Monday, September 26, 2011

There Is No “Social Contract” To Soak The Rich

Vader:  Calrissian, take the Princess and the Wookie to my ship.
Lando:  You said they'd be left at the city under my supervision!
Vader:   I am altering the deal. Pray I don't alter it any further.
—James Earl Jones as the voice of Darth Vader and Billy Dee Williams as Lando Calrissian in Star Wars Episode V: The Empire Strikes Back

My Dad suggested at some point I title a post "They Really Believe That?"  The trouble is, that title could apply 2-3 times a week.

Last week Paul Krugman, piggybacking off claims made by Senate candidate Elizabeth Warren, continued banging the ridiculous drum that the rich don’t pay their fair share, this time claiming that it’s actually the rich waging class warfare on the poor by reneging on the “social contract” that has allowed the rich to get rich in the first place: 

“Elizabeth Warren . . . recently made some eloquent remarks to this effect that are, rightly, getting a lot of attention.  ‘There is nobody in this country who got rich on his own.  Nobody,’ she declared, pointing out that the rich can only get rich thanks to the ‘social contract’ that provides a decent, functioning society in which they can prosper.”   

At the core of this argument was an unidentified “new estimate” from the Tax Policy Center, which Krugman claimed showed that 25% of those earning over $1 million pay a combined effective rate of 12.6%, which he then says—without any supporting data—is less than the rate paid by some unidentified group of “middle class” wage earners (never mind, of course, what happens with the other 75%).  Significantly, the Tax Policy Center late Friday apparently withdrew several recent estimates, including one titled “T11-0361 - Distribution of Effective Individual Income and Payroll Tax Rate, Under Current Law, by Cash Income Level, 2011”—one suspects this is what Krugman was referring to—saying that they had made an error that overstated some high income earners’ income, and thus understated their relative tax burden.  

What’s the over/under on how long it takes the Times to issue a correction?

Of course, these “social contract” arguments ignore other data from that same Tax Policy Center showing that in 2010 the combined income and payroll tax burden on families at the poverty level was between negative 20% and -27.2%, depending on their number of children.  That is, after deductions and credits, these people are net recipients, rather than disproportionate contributors.  And as I reported last week, according to the IRS, the average total tax liability—that’s net of credits and including the payroll taxes of which Krugman and the Left are so proud—for a head of household with AGI of $50,000 was 6.4%, or half this 12.6% magic number that has set them off (the real average combined tax burden for those earning over $250,000 and over $1 million is actually 23.1% and 31.2%, respectively). 

The suggestion that the wealthy as a group are cheating the poor and middle class by paying a lesser percentage of their income in total taxes is demonstrably false.  To the extent there’s any disparity in the rates being paid by different income groups, we could easily cure it by reverting to a flat 10% (or pick your number) tax for everyone, regardless of income level, but I’m betting we won’t get any takers on the Left.

Interestingly, for all their “social contract” indignity at the wealthy’s relative contribution to society, Krugman and the Left conveniently ignore charitable giving.  You want to talk about social contracts and mutual contribution to the greater good?  According to a 2005 study by the Center on Philanthropy at Indiana University, those making over $200,000 and over $1 million consistently and by a wide margin out-contribute the middle class and poor to charitable causes benefiting society at large:

Basic Needs

Percentage of Households Contributing

Average Contribution




$200,000 - $1 million



>$1 million




Percentage of Households Contributing

Average Contribution




$200,000 - $1 million



>$1 million




Percentage of Households Contributing

Average Contribution




$200,000 - $1 million



>$1 million



So in addition to the disproportionate burden imposed by what the government forcibly takes, the wealthy voluntarily contribute to the greater social good at a much higher rate than others, both in terms of total participation, and dollars.  The vast, vast majority of the middle class and below contribute literally nothing at all.

But focusing on the specific numbers ignores the real problem, which is the conceptual notion that the wealthy owe some quasi-contractual obligation to fund the existence of the rest of society.  As I recall, the Lockeian concept of social contract embodied in the Declaration of Independence was that government exists to protect private property, not to take it.  The idea is that in a perfect world there would be no government, and we would each have total freedom to conduct ourselves as we see fit.  But because it is not a perfect world, we need the social contract of government whereby each cedes a certain amount of his absolute freedom in order that the government can protect life, liberty, and property.  For example, each of us cedes our liberty to kill the other.  Nowhere, however, did the "social contract" concept envision granting one man a right to live off the labor and property of another.

Krugman and the Left also fundamentally misunderstand the nature of a contract.  There are three basic attributes of a contract.  The first is it must be a voluntary arrangement.  Michael Corleone’s tale of his father and Luca Brasi obtaining Johnny Fontaine’s contract release at gunpoint makes for good cinema, but at law a contract obtained under that kind of duress is unenforceable, because it’s not a voluntary agreement.  In our tax context, there’s been no agreement to a social contract of that nature.

The second attribute of a contract is there must be an actual agreement.  The parties must reach a meeting of the minds as to the nature and specific terms of their relationship.  The very fact that we’re having this discussion tells you there is no meeting of the minds here.  An agreement or contract cannot come into being simply because one side declares it to be so. 

The third attribute of a contract is there must be mutuality of obligation.  I owe you something, but there must be some return obligation on your part to do something or to refrain from doing something in exchange for my obligation.  And this is really where the social contract analogy falls apart, because the social contract exchange is each of us ceding that certain part of our liberty to secure society; everyone makes the same contribution of his ceded liberty, and that exchange has already been made.  What Krugman and the Left are trying to do with their “social contract” is tack on an additional obligation for someone who does well financially to contribute disproportionately from their assets to what the Leftist in his sole judgment decrees is the greater good (i.e., for the Leftist to give to someone else). 

The problem is, I haven’t received my presumed additional “benefit” of this social bargain from something additional given by those who are going to receive from my disproportionate contribution.  I’m not wealthy because the middle class is middle class or because the poor is poor, or because of something they’ve given me.  I’m to pay in, but those who take out have no corresponding obligation to me.

That’s not a contract, it’s an involuntary servitude.

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