When former President Obama was running for re-election in 2012, he made his famous “You Didn’t Build That” speech in Roanoke, Virginia. I blogged about it back in August 2012 and got almost a record number of comments.
Obama was right if all he meant is that in building your business, you needed roads and bridges that taxes paid for. But if you look at the speech, you’ll see that the famous statement about not building that comes right after a whole section in which he’s trying to justify letting the Bush tax cuts expire for the top 2%. In short, he wants to raise tax rates on the top 2%. Immediately after discussing taxes, he states the following:
There are a lot of wealthy, successful Americans who agree with me — because they want to give something back. They know they didn’t — look, if you’ve been successful, you didn’t get there on your own. You didn’t get there on your own. I’m always struck by people who think, well, it must be because I was just so smart. There are a lot of smart people out there. It must be because I worked harder than everybody else. Let me tell you something — there are a whole bunch of hardworking people out there. (Applause.)
If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business — you didn’t build that. Somebody else made that happen. The Internet didn’t get invented on its own. Government research created the Internet so that all the companies could make money off the Internet.
Why rehash this now? Because Cato policy analyst Derek Bonett has a particularly nice way of laying out what’s wrong with Obama’s thinking. He does it with his “Tale of Two Commuters.” Here’s an excerpt:
Imagine two commuters living equidistant from a downtown city law firm. One is an attorney at the firm, the other is her secretary. Each drives to work, thereby obtaining some value from the use of public roads. Each, in turn, imposes a roughly equal amount of depreciation on those roads, the cost of which must be defrayed via taxes. But what about the value “built” by each of them once they reach their office?
The attorney will almost certainly command a far higher salary than will her secretary. Insofar as these salaries emerge from a competitive market for labor, they reflect, at least within an order of magnitude, the respective marginal products of these commuters’ labor. But, crucially, the attorney’s higher salary is not attributable to a greater consumption of public goods. She traversed the same roads on the way to work as did her secretary. The two of them rely on the same police and fire departments. They may have even attended the same local, public K-12 schools. The attorney’s higher salary is instead attributable to her command over a set of skills and human capital which are more scarce – and more valuable – on the market than are secretarial skills. The salary differential, and the difference in productivity it reflects, cannot be explained by differential public goods consumption. In each case, some degree of public goods and services may be a necessary complement to these employees’ labor, but they are not sufficient to explain their differential success in earning taxable income. In what way is society justified in expropriating a greater percentage of the attorney’s income because her labor is more productive, and therefore commands a higher salary?
And here’s what follows for tax policy if you’re going to use government’s contribution to productivity as a basis for taxation:
The logic of “you didn’t build that” leads unavoidably to the following conclusion: few forms of proportional taxation, and certainly no progressive marginal rates, can be justified on the basis of public goods consumption.
I wouldn’t necessarily apply that to taxation for defense, because wealthier people have more to defend. (Note, though, that the so-called defense budget is mainly about offense. If we wanted a defense budget purely for defense, my guess is that we could cut the DoD budget by over 60%.) But Mr. Bonett is certainly right that you can’t justify progressive income taxes based on use of roads and bridges.
READER COMMENTS
Dylan
Nov 9 2018 at 1:49pm
This seems a shallow way of looking at things. Leaving aside David Graeber’s argument that many of the higher paid jobs, far from being more productive, are really BS jobs that don’t produce anything of actual value (and in many cases destroy value like many finance jobs, mine included), the real problem with this line of thinking is that nothing in Obama’s speech argues against someone being more productive with assets then other people are. It is purely a rhetorical push-back against the self-made man narrative that permeates America. That myth is a useful fiction up to a point, but it is important to also recognize the importance of the infrastructure an individual is surrounded by that makes that success possible. And that infrastructure goes far beyond roads, and is extremely important to any individual success. Note all the literature that Prof. Caplan cites on how simply relocating a person from a country with poor institutions and infrastructure, to one with better ones greatly increases their productivity and compensation.
To my eyes, this makes one part of the leg of an emotional appeal to progressive taxation. It of course doesn’t tell you exactly what the level of that taxation should be, or if a given level is too low or too high…but that’s not the purpose. The purpose is to shift thinking in your direction, after which the more nuanced discussions can be had in a more favorable climate.
robc
Nov 9 2018 at 5:23pm
Disagree. It doesn’t support progressive taxation. It strongly suggests we should toll the road.
And I haven’t run into any progressive tolls (except possibly by weight or number of axles).
David Henderson
Nov 9 2018 at 6:05pm
I agree with your pro-toll policy position. I’m not sure whom you’re disagreeing with.
robc
Nov 12 2018 at 10:32am
I was disagreeing with Dylan who said:
Alan Goldhammer
Nov 10 2018 at 8:37am
@robc – I believe that the tolls on a couple of highways in Virginia are progressive and linked to traffic volume at rush hour. I live in Maryland and have not driven on these highways during rush hour but there have been a number of articles about the implementation in the past year.
The use of RFID transponders (EZ-Pass and their ilk) makes it possible to charge for driving on surface roads other than highways, generating “use fees” for car travel. Is this the correct ‘Libertarian’ approach to generating revenue? If you don’t use it, you don’t pay.
David Henderson
Nov 10 2018 at 11:39am
Alan, The tolls are not progressive. To be progressive, they would be based on the income or wealth of the users.
Yes, user pays is the typical libertarian solution, whether the item be hamburgers, houses, or highways.
Mark Z
Nov 10 2018 at 12:09am
First of all, finance is productive. Industries like finance are attacked as non-productive often based on little more than deep-seated, ancient prejudice (or lack of understanding of what financial markets actually do). If you want to find non-productive, “BS” jobs, the best places to look are likely in such hallowed industries as healthcare and education, where tens of thousands of people are paid middle class wages and hailed as saints to do jobs rendered obsolete by 1990s era software.
Secondly, I don’t think productivity-based analysis would yield a result favorable toward progressive taxation. If anything, if we taxed people according to the cost they imposed on society and rewarded them according to their marginal productivity, the result would likely be more unequal than the status quo. Productivity may be even less evenly distributed today than income.
Dylan
Nov 10 2018 at 4:20am
I’ve worked in and around the “Wall St.” world most of my career. Before I started I also thought these types of jobs were useful, and I still think there are useful elements. But the vast majority of the work I’ve personally done can clearly be labeled as non-productive. I started out working in a hedge fun, in good times we would be paid well even though we were only fractionally above the benchmark and that was almost certainly luck and not skill. When we made a bad trade that wiped out the fund, we lost nothing of our own, but our investors lost a lot. More lately I’ve been a consultant helping companies with M&A. The company I work for gets paid hundred of thousands a year by clients, even though we are rarely successful doing what we were hired to do. The few times we have been “successful” we’ve racked up huge success fees, but every deal I’ve personally been involved in has badly damaged both the company being acquired and the one doing the acquiring. I’d be fully willing to accept that I’m just bad at my job, but the literature seems to suggest that my experience with M&A destroying value on average is not an anomaly. I’m in full agreement that this phenomenon is wide spread and health care and education are two other areas where we’re likely to see a lot of BS work.
On your second point, I’m not sure why we would want to tax people based on the cost they impose on society, rather than the benefit they are able to get from it?
Mark Z
Nov 11 2018 at 2:09pm
How do we determine what someone’s marginal utility from a public service is when there’s no market for it? In a competitive market, price tends toward cost, which is why I suggested that. But as long as the state has a monopoly, it can “charge” whatever it wants.
Now, I’d be in favor of privatizing as many public services as possible and shifting toward people paying market rates for what they consume, but I’m doubtful this will tend to impose costs in a more progressive manner.
John Hare
Nov 9 2018 at 3:18pm
i didn’t build that? It certainly wasn’t the ones that didn’t try to do better, which is implied in the statement. They weren’t working 80 hour weeks and living on a tight budget in order to invest forward. I still get annoyed about that statement.
dennis
Nov 9 2018 at 3:24pm
I don’t think the analyses is correct. The “skills” that the lawyer possesses have zero value without the roads. And the the marginal value of the roads is significantly higher for the lawyer than it is for the secretary.
If the government was a private monopoly, they would charge a price (tax) for the road so as to extract all value that the lawyer generates.
If the roads were provided by perfectly competitive market, then they would get built at marginal cost. Who would pay for it? Again the lawyer would pay most of it.
You end up with the lawyer paying progressively more in either case.
John Hare
Nov 9 2018 at 4:31pm
You mean the same way that lawyers have to pay more for cars or gasoline?
David Henderson
Nov 9 2018 at 6:06pm
Nice and succinct, John.
dennis
Nov 10 2018 at 12:50am
Yes. If cars and gas were provided by a monopolist that could price discriminate, then they would extract all of lawyer’s salary for the price of the car and the gas.
At the other extreme, cars and gas are provided at marginal cost to the lawyers. The secretary unfortunately can’t afford the car at that price and has to take the bus 😉
It’s not a linear relationship between input and marginal output. I am guessing it would be hard to be lawyer without the law.
RPLong
Nov 9 2018 at 4:36pm
I’m not opposed to Mr. Obama’s sentiment, in principle. I think the idea that social institutions and assets like roads allow entrepreneurs to build successful companies is basically right.
But it also reminds me of my time in Northern Alberta, where it was not uncommon to see roads and infrastructure built entirely by oil, mining, and timber companies to facilitate their business. Those roads last and that infrastructure lasts long after the oil and gas is gone, sometimes leaving a whole new city in its place, with a local economy all of its own.
So, in my view, Mr. Obama isn’t wrong to say that successful businesspeople had help in the form of local infrastructure and institutions, but he might be wrong if he thinks that this always requires government financiering.
David Henderson
Nov 9 2018 at 6:07pm
RPLong,
But my point is that he was saying this in the context of justifying higher tax rates on higher-income people. So if you say you’re not opposed to his sentiment, what sentiment are you talking about?
RPLong
Nov 12 2018 at 8:33am
David,
Point taken. I don’t think Obama’s rhetoric is sufficient justification for higher tax rates, nor do I think it’s sufficient justification for a lot of infrastructure spending. The sentiment I do agree with, which I tried to articulate in the second sentence of my first paragraph, was that existing infrastructure and institutions help business people create successful businesses.
I guess I was trying to say that even if we take Obama’s premises for granted, that still doesn’t necessarily justify his policy prescriptions.
TMC
Nov 9 2018 at 5:23pm
Obama was smart enough to deliver a speech that appealed to the voter’s emotions. Had he tried to appeal to their intellect, he’d still be a community organizer.
nobody.really
Nov 9 2018 at 7:38pm
How much do people “deserve”? What amount of their earnings are the results solely of their own efforts?
I guess we could learn something from comparing a secretary to a lawyer. But in an extended series of posts, I found it more useful to compare the earnings of J.S. Bach and Justin Bieber. Bieber earned more. Obviously it’s because he’s harder working. To deny that would be to deny that he “built that.”
Mark Z
Nov 10 2018 at 12:10am
So, the labor theory of value, then? Not a winning argument, imo.
nobody.really
Nov 11 2018 at 3:00am
Huh? I don’t see where I have espoused ANY theory of value.
Rather, I understand this “I built that” argument to address CAUSATION. Someone wants to claim to be the sole cause of an outcome. But causation is a poorly-defined concept. So I invite people to compare people engaging in very similar behaviors in very different contexts, and observing the different results. This persuades me that CONTEXT is a huge driver of results.
Conceptually we could run regression analyses against wealth to identify relevant factors. As a simple matter, consider the number of billionaires in the world. There are thousands. To say that each of these billionaires was the sole driver of his wealth begs the question, why were there no billionaires prior to 1916? And why so many now? It sure looks like becoming a billionaire correlates with context–a context the billionaire did not create.
Now, what percentage of billionaires are male? What percentage are able-bodied? What percentage were born in the US or China? The number of variables that do NOT correlate with individual initiative is vast.
Does that mean that initiative has no relationship to outcome? No. For example, I suspect a large percentage of lottery winners took the initiative to buy a lottery ticket. Which demonstrates more initiative than billionaires took in choosing to live during the era since 1916.
I’m happy to acknowledge that people “built that” in the same sense that I acknowledge that a lottery winner “built” her jackpot by buying a ticket. Any other conclusion would entail embracing a “labor theory of value,” right?
Mark Z
Nov 11 2018 at 2:24pm
You implied Bach ‘deserved’ more than Bieber because the former worked harder than the latter. How hard you work doesn’t determine the value of your labor though.
And your lottery example is a non sequitur; yes people may be lucky to be born in a given time or place. That’s quite beside the point. Being born in a time or place in which you are more productive than if you were in a different time or place also tends to mean you earn more than if you had been born in a different time or place. IMO, there’s nothing morally wrong with that, and much that’s harmful in trying to ‘correct’ it. Regardless of why one person has higher marginal productivity than another, taxing them disproportionately to compensate for the inequality also disproportionately reduces their incentive to make productive use of their labor. Lebron James gets paid far more to play basketball than I do, and he’s better at it largely because of circumstance; he certainly didn’t ‘build’ the conditions that made him so much more productive on that front than me. Indignant though I may be at the unfairness of it, it’s greatly to the benefit of society that he gets paid so much more to play basketball than I would. The closer you push us toward economic equality, the less incentive he has to do what he’s good at instead of something that’s just easier.
Mark Z
Nov 10 2018 at 12:15am
Also, why not ask the question, “how much do people deserve to be taxed?” In that case, the logical answer seems to be (if we stick to Obama’s line of reasoning): the cost of providing the public services they use. The result of such a system, however, would be highly regressive. 1%ers almost certainly pay far more in than they get out (unless they make their money from government contracts).
You might say, why should people only pay the cost of what they consume? To which I would say, inasmuch as the government could charge people more than the marginal cost of producing public goods/services, it’s largely because of the monopoly it grants itself, by force, in the provision of such public goods and services, a monopoly it enforces… primarily using the money it has taken in taxes from disproportionately wealthy people that ‘didn’t build that.’
nobody.really
Nov 9 2018 at 8:39pm
To what extent are our successes the result of our own efforts, as opposed to the results of circumstances beyond our efforts?
In certain locations in Argentina, Brazil, and Paraguay, people tend to achieve 10-15% more education, and 10% more earnings, than their neighbors. These locations have something else in common: 400 years ago, Jesuits created missions there, teaching reading, writing, arithmetic, blacksmithing, and embroidery. The Jesuits were expelled 250 years ago—yet the legacy of their economic development endures.
Doubtless, every person who lives in these regions would report that he worked hard to achieve the level of education he has. Of COURSE he earned his success. It would be absurd to credit forces he never even heard of for contributing to his success, right?
But what explains the data?
Mark Z
Nov 11 2018 at 2:32pm
Even if you take a fully deterministic approach in which one’s productivity is entirely attributable to forces beyond one’s control, it doesn’t justify the disproportional taxation of those rendered disproportionally productive by circumstance. The more valuable one’s skills are, regardless of their origin, then more beneficial it is to society that they be used productively. It may be largely irrelevant what job an unskilled, uneducated person decides to pick. He may be a better farmer than a miner, but not so much better that it will make as much of a difference as, say, if a person who could be a great surgeon instead decides to become a mediocre farmer. It is far more useful not just to the potential surgeon, but to society, that he be lured into that field where he will be more productive. Hence the pay differential.
Dylan
Nov 12 2018 at 11:11am
Now we’re getting somewhere. Assume a largely deterministic universe, but where incentives are just one of the factors that determine what we do and how productive we are. Now try and design a utility maximizing framework for that world that works in a Rawlsian veil of ignorance kind of way to provide an environment where the productive have the right incentives to be as productive as possible, but where the less productive are not resigned to a life of absolute poverty. Is some level of moderate progressivity in taxation incompatible with that goal? That doesn’t seem obvious to me. But I’m looking at it from an ends perspective, not the means. The end state of trying to make an unfair world a little more fair is the goal. Then it is a matter of figuring out the optimal way to get there.
Wil W
Nov 9 2018 at 11:32pm
Let’s think for a second about the efficiency of the attorney that allows the attorney to pull such a large salary. Let’s imagine a law firm with one attorney and no other employees. We can measure the attorney’s productivity at this point and we have a base productivity.
Now let’s imagine a attorney with one assistant (a secretary). The secretary doubles the road use, but provides a method to increase the productivity of the attorney. The secretary is still only benefiting from a single road use, but the attorney benefits from two road usages.
So this statement is at least marginally incorrect. The amount of the attorney’s salary increase due to the productivity increase from having a secretary. This increase requires a second road use. Without the public goods being available to both, the attorney cannot gain the productivity increase.
Alan Goldhammer
Nov 10 2018 at 8:46am
@David – very nice post! One thing related to this that some posts have covered is what proportion of ‘stuff’ should be paid for by out of general tax revenues versus user fees. I don’t mind paying taxes as long as there is demonstrable value for the goods and services. For me good schools, libraries, parks, and pot-hole free roads fall in the ‘demonstrable value’ category for me (I recognize that others might have differing views). Of course these are largely local goods and services and things get more complicated when looking at various Federal programs (as David notes, the US defense spending is largely offensive).
Instructive is this week’s state election in Michigan where the one of the pillars of Democrat Gretchen Widmer’s campaign was ‘fix the damn roads.’
David Henderson
Nov 10 2018 at 11:42am
Thank you.
Billy Kaubashine
Nov 10 2018 at 10:55am
Almost half of the people pay NO Federal income tax. When it comes to infrastructure, defense, etc, the one thing we know for sure is that those non-payers didn’t contribute to building ANY of it.
Seppo
Nov 10 2018 at 5:04pm
I think that I read from this particular site a quote from Adam Smith that stated something along the lines that it is the rich, that benefit from government which prevent poor from robbing them, maintaining status quo or something along those lines.
It doesn’t matter if the safety is provided by “government” or private security providers. The more you own, the more you will end up spending on your safety. Securing a shack costs next to nothing, because there is nothing to steal, but securing your mansion with huge estate does cost considerable manpower.
I think that progressive taxation mostly fits the definition of value based pricing. The more you earn and own, the more you benefit from orderly society which enforces protection of ownership etc. We can also argue that road provides more value to attorney that makes $100/hour compared to a secretary making $10/hour and therefore is worth more for the former.
Especially when it is the attorney who benefits from the complexity of the law created by government, which is the source of his business in the first place. It is also the doctors who benefit from regulation of medical services, business owners who benefit most from law enforcement etc.
Mark Z
Nov 12 2018 at 5:11am
I don’t know the security business well, but I imagine there are likely economies of scale. The total amount a person or business spends (or would spend, absent free security from the government) on security may increase the the wealthier they get, but the proportion of their income they spend on security would likely decline. I think this would likely be the case for other freely provided public goods as well. It’s not enough that the total value of the public good increase with the income of the recipient to justify a progressive tax; the value of the public good must rather increase more than linearly with the recipient’s income. And diminishing marginal utility may actually lead things in the opposite direction: a person will pay a higher rate to insure their first $100,000 worth of property than their second $100,000, and so on, so a person with $100,000 in net worth may be willing to pay a higher rate (even if a lower amount in total) to insure their property against theft, destruction, etc. than someone with $1,000,000 in net worth. So I’m not sure having ‘more to lose’ actually does vindicate progressive taxation.
Floccina
Nov 12 2018 at 3:58pm
Of course in the real world, except for the huge consumers with huge homes, it is often the opposite, it cost more to secure a home in worst part of Chicago than in the more upscale areas, although as far as defense against forgiven invaders the upscale probably costs more.
Floccina
Nov 12 2018 at 3:52pm
Another angle is that the maker of most goods and services generally captures only a small part of the benefit of what they create so the even LeBron James is giving to the public (probably much more) in proportion than he used just doing what he is doing not paying taxes at all.
Phil H
Nov 15 2018 at 5:21am
If the business owner employs people, then they gain marginal value from their employees’ education. That’s one way in which a more wealthy person might well benefit more from government spending than a lower-income person.
In your lawer vs secretary example, the lawyer makes money from the court system – a government institution. And the lawyer may well have attended higher education at a state university.
Overall, it’s far from obvious that a low-income person and a high-income person will on average use the same amount of state-funded resources. In general, to make more money, you’re going to use more resources; and some of those will be public resources.
Personally, I don’t even want to do the calculation. For me, the state should provide public goods, and they should be provided in sufficiency (that’s the point of the state). But I would be stunned if it turned out that low-income people actually use more public goods.
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