On Incentives

"Never penalize those who work for us for mistakes or reward them for being right about markets. It will go to their heads, is counterproductive and, in any event, material compensation will not correlate with their ability to predict the future next time."

Site Search

Writings & Speeches

A Satire: The Case for the Rich

Warren Buffet has suggested that the rich, defined as anyone making more than a million dollars a year, should pay higher taxes. President Obama's recent tax proposals are in the same vein albeit at a lower level - $250,000 a year. The rich for the most part have been reticent, indeed embarrassed, to make public their case in opposition to higher taxes. Now, what are their arguments?  

  • They buy watches made by Rolex, shoes from Manola Blahniks, bags from Bottega, jewelry from Tiffany, yachts, and stuff like that. No other income group except the top 1% can afford those products. It is the privileged few who purchase goods along Fifth Avenue, Million Mile, Rodeo Drive, and similar places throughout the country, thereby providing support for shopping centers, service providers, middle-class sales people, and janitorial staff. Not to be dismissed is the pleasure for window shoppers, the increased tourism, air and rail travel, hotel occupancy, and the overall satisfaction of the less fortunate who revel in the brightly-lit and beautifully-decorated stores at Christmas time.
  • The rich spend their savings, when not consuming, by financing such institutions as the Metropolitan Opera, the Metropolitan Museum of Art, and their counterparts in virtually every city in the United States.  And for those who cannot afford tickets, it is the rich who subsidize low-cost admissions and HD movies for those who could not otherwise afford to go. 
  • They consume goods made, not just in the United States but also  in countries in the Far East and Latin America. That permits these countries to provide goods and services at much lower prices because of their low wages, thereby keeping a lid on inflation. Moreover,  purchases and investments outside the United States contribute to the overall well-being of hundreds of millions living in poverty, surely a great advantage in a world beset by violence, terrorism, and anarchy typically prompted by poverty.
  • The rich can afford to finance their children's and grandchildren's education in expensive colleges and universities, which permits their offspring to do worthy public service rather than crassly entering private law firms or investment banks to pay off what otherwise would be a crushing burden of debt.  And they can send their children to private schools relieving the pressure on over-crowded classrooms in public schools. 
  • They can afford the very best medical care during their lifetimes, thereby delaying the cost of terminal care – proof of the validity of the time value of money
  • With their excess savings, the rich buy bonds, which supports local and state government and not incidentally, the more they buy, the lower the level of interest rates – a good thing. Similarly, their investments in the stock market benefits everyone by providing a steady stream of buying power in the market. Moreover, by making such investments, they provide liquidity for others not so fortunate who need to liquidate their modest investments in case of emergencies – which occur with increasing frequency for those who have minimal savings.
  • They can leave more to their children and grandchildren at their demise, often, therefore, removing them from a weak job market, a particularly salutary benefit during times when jobs are scarce.
  • They don't need Social Security and, therefore, can forego cost-of-living increases in order to save the system for those who need it to survive.
  • They are likely to use more lawyers, asset managers, financial advisors, accountants, medical professionals and others to manage their wealth and health, thereby providing a foundation to support core service employment. 
  • They buy baseball, football, and basketball teams and build huge sports arenas, which provide employment  across a broad economic spectrum. This often benefits minority groups, while at the same time providing excitement and distractions for spectators as well as TV viewers who otherwise might wallow in their unfortunate condition.  Indeed, history records the pleasure of the masses in anticipation of the gladiators battling each other (and lions) at the newly opened Coliseum.
  • The rich purchase art valued in the hundreds of millions of dollars, providing liquidity for reluctant owners, who, burdened with their inheritances, can then invest or spend those funds, while at the same time providing incentives to paint or sculpt for those who might otherwise live in squalor in an attic.
  • The rich have founded universities, libraries, art galleries, and philanthropic institutions. Indeed, just like the popes and kings who financed the Renaissance, their counterparts today will do the same  – if they too are allowed to maximize their wealth.

To summarize:  the more the rich have disposable income for consumption and investment, the more they can do good stuff.  If instead, their increased taxes were distributed, either by direct grant or part of a stimulus package, to the 95 percent in the middle- and low-income classes, to help them meet the basic necessities of life, then, given their sheer numbers,  each recipient would have little left over after expenditures for food and shelter. After all, what would our economy gain if each member of our society were to receive $30 a month – a few extra macaroni and cheese dinners?  Imagine instead how and where that $100 billion would be spent or invested by just a few.  Better such monies should be concentrated, increased, and accumulated by those precious few – the fewer the better. 

Gene Rotberg was formerly Vice President and Treasurer of the World Bank.