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January 13, 2003

earned and unearned income

The President's surprise proposal to abolish dividend taxes is big news. There are many ways to evaluate the idea, including consideration of the effects on short- and long-term economic growth, equity, and the federal budget. The Administration also emphasizes that a dividend tax is unfair, since the income that was used to buy the shares was already taxed once. (The response from commentators like Paul Krugman is that there are many double taxes, including all sales taxes.) Another consideration seems to be overlooked. I believe we should retain a distinction between earned and unearned income, and we should be less hesitant to tax the latter. There is nothing wrong with investment income. But work—purposeful human effort—is much more closely linked to human dignity and value. As Pope John Paul II wrote in Laborem Exercens (1981), "Work is a good thing for man-a good thing for his humanity-because through work man not only transforms nature, adapting it to his own needs, but he also achieves fulfillment as a human being and indeed in a sense becomes 'more a human being.'"

Robert Nozick, the great libertarian philosopher, denied that there was any moral difference between work and other activities (such as investing) that produce value. He was reacting to the old leftist idea that labor alone creates value, and therefore laborers deserve the full price of their products. It is a scandal of capitalism that some of the reward goes instead to capitalists, who do not work. In the words of Ralph Chaplin's old Wobbly anthem, "Solidarity Forever" (1915):

It is we who plowed the prairies; built the cities where they trade;
Dug the mines and built the workshops, endless miles of railroad laid
* * *
All the world that's owned by idle drones is ours and ours alone.
We have laid the wide foundations; built it skyward stone by stone.
It is ours, not to slave in, but to master and to own.

This song implies that we should recoup the money that capitalists have taken from the workers who really made everything. Dividend taxes would then be a good idea, and the higher the better. Unfortunately, the song is pretty clearly wrong: investors, managers, and inventors create value, just as workers do. However, we can still understand labor as morally different from other economic activities. Compare two people, one of whom makes a living by digging ditches, while the other profits from inherited stocks even though she is comatose after an accident. The first labors; the second does not. An intermediate case is someone who actively invests, mixing knowledge, intellectual labor, and accumulated capital to generate wealth. I think that the work aspect of wealth-creation is virtuous, onerous, and not sufficiently rewarded by the market. This is an argument for policies (such as dividends taxes) that favor work.

(All this is "auto-plagiarized" from a law review article I wrote some time ago.

My wife and I went to an event at my 3-year-old's nursery school today. She saw me still in my pajamas just before she left for the day, and said "Daddy, you will get dressed before you come to my school, won't you?" This is the beginning of at least 18 years of her worrying about whether I am about to embarrass her in public.

January 13, 2003 5:18 PM | category: philosophy | Comments


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