Are profits ill-gotten gains, reaped through exploitation of workers and consumers? Or do they represent earned income that plays a positive role in our economy?
That is one of the fundamental questions being raised about our economic system by Washington’s current political class. Today, the validity of the heretofore established assumption about the nature of profits is being systematically subject to challenge from the White House and the halls of Congress.
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"Speaker Nancy Pelosi challenges the profits of health insurance companies, even though the total profits of the top 10 health insurers combined amount to only 1/300th of total health costs." |
House Speaker Nancy Pelosi challenges the profits of health insurance companies, even though the total profits of the top 10 health insurers combined amount to only 1/300th of total health costs. The White House decries the profits of Wall Street, and the earnings of top executives. Firms that can’t make profits, however, like the auto companies, are showered with hundreds of billions in taxpayer money.
Profits are compensation first and foremost for capital investment. Investors deserve at least interest on their capital. Additional compensation is merited for the risks investors undertake in starting and operating business enterprises. Since investors bear the losses if the business fails, they deserve at least part of the gains if the business succeeds. Otherwise, they may rightly not invest at all. Investment is new and small business is where the majority of jobs are created without it, private sector job growth would be severely curtailed if not impossible.
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"Higher profits are earned only when the entrepreneur provides some special service or benefit to the public. Innovations like life saving miracle drugs bring additional profits for a time. " |
Higher profits are earned only when the entrepreneur provides some special service or benefit to the public. Innovations like life saving miracle drugs bring additional profits for a time. The validity of such profits is recognized in our own Constitution, which provides for patents for inventors, giving them the chance to reap monopoly profits for a limited period on their innovations. But such higher than normal profits are always temporary, as others learn to copy the innovation, or the patent eventually runs out.
Profits provide the incentives that make our economy work. The prospect of profits induces the investment essential to the creation of new jobs. Investors seeking profit invest the capital that provides the tools and equipment that increase productivity, which is what finances higher wages over time. Profits induce the race to get there first with innovations, making our economy the most innovative and advanced in the world.
In short, it is profit that produces the traditionally high American standard of living, which has prevailed since the early 18th century. This is the foundation of the American Dream, which has drawn working people to our shores from all over the world for hundreds of years.
But this traditional American prosperity is at risk today due to the neo-socialist worldview of the current President and Congressional leaders. Their record shattering deficit of $1.4 trillion this year is almost 10 times larger than the deficit of $160 billion in 1996. Under the latest budget policies, the national debt will double over the next 5 years, and triple over the next 10 years, to $17.3 trillion.
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"These reckless, runaway spending policies put the job-creating free-enterprise system at risk because government is systematically taking too much of the available capital that would otherwise be used for investment ..." |
These reckless, runaway spending policies put the job-creating free-enterprise system at risk because government is systematically taking too much of the available capital that would otherwise be used for investment including the now generally accepted failed $800 billion stimulus bill, the $400 billion Omnibus additional spending bill adopted a couple of weeks later, and the one-third increase in federal welfare spending already enacted. All this fiscal pressure, and the cheap money policies of the Fed fully supported by President Obama, are leading to a collapsing dollar. These policies can only lead us to inflation and soaring interest rates as they did in the 1970s.
The “profits as ill-gotten gain” model is playing itself out in the policies emerging from Washington, particularly its recklessly high-tax policies. The income tax surcharge in the House health bill combined with the tax rate increases in Obama’s budget, plus average state income tax rates, will push the top tax rate in America to over 50%. In 5 states, California, New York, New Jersey, Oregon, and Hawaii, the top income tax rate will be higher than in socialist Sweden!
Congress also supports raising capital gains tax rates by 66%, and restoring the repetitive death tax with a 45% rate. With most of the rest of the world learning the lessons of Reaganomics and adopting lower tax rates to create prosperity and jobs, the current leadership in Washington adopting the opposite assumption where profits and prosperity will be a thing of the past.
Peter Ferrara is Director of Entitlement and Budget Policy at the Institute for Policy Innovation. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under the first President Bush.
