WEALTH AND TAXES FROM ARISTOTLE TO MORE RECENT TIMES

American billionaires are unlikely to appreciate Aristotle’s observations about wealthy people (On Rhetoric: A Theory of Civic Discourse Book 2, Chapter 16. Transl. by George A. Kennedy, Oxford Press, 1991).

 

  1. “The wealthy are insolent and arrogant, being affected somehow by the possession of wealth; for their state of mind is that of those who have all good things; for wealth is a kind of standard of value for other things, so that all things seem purchasable by it.
  2. And they are ostentatious and pretentious: ostentatious because of luxury and the display of their prosperity, pretentious because all are used to spending their time doing whatever they like and admire and because they think everyone else has the same values they do. At the same time this feeling is not unreasonable for there are many who need what they have. Thus, Simonides replied to the wife of Hieron, when she asked whether it was better to be rich or wise: ‘To be rich’ for he sees the wise waiting at the doors of the rich.
  3. Another result is that the rich think they deserve to rule for they think they have that which makes one worthy to rule [i.e. money]. In sum, the character that comes from the rich is that of a lucky fool.
  4. The characters of the newly rich and those with old wealth differ in that the newly rich have all the vices to a greater degree and in worse form, for to be newly rich is to lack education in the use of wealth . . . . . . . . “

 

In Aristotle’s time (384-322 BC) practically all wealth came from owning land. From it one could produce goods that could be sold and traded. Aristotle might be a little more charitable about the United States, where wealth could be created by creative and industrious people who took risks. John D. Rockefeller was an industrial genius who created wealth for the nation as well as himself. Toward the end of his life Dale Carnegie gave away virtually all his wealth to socially beneficial purposes.

 

From trivial taxes of the Gilded Age from 1870 to 1895 the U.S. moved to confiscatory tax rates on high income brackets during the Depression and World War II. 90% top tax rates remained in the 1950s. In Capital in the Twenty-First Century, the 2014 epic study of American income and wealth, French economist, Thomas Piketty observed that in the 1950s the U.S. had the lowest ratio of top incomes to worker incomes among advanced nations. Businesses nevertheless thrived, leaders valuing their status and identification with their business and industry.

 

This changed in the minimum-tax 1980s. Compensation packages became a symbol of status for executives. In a paper in 2014 Piketty coworkers, Saez and Zucman, reported that in 2012 the income of the top 10% topped 50% of the economy for the first time since 1927.  The change in time can also be  epitomized by the difference between by Lee Iacocca, who saved Chrysler Motors and was committed to workers, and Jack Welch, who transformed General Electric from one of America’s most advanced and sophisticated manufacturers to a banking giant. Welch became  known along the way as “Neutron Jack” for his readiness to fire underproductive staff. His policies ultimately led to the unraveling of General Electric, which was dropped from the Dow Jones Index in 2018 after drastic decline in its market value. General Electric is said to have the most underfunded pension system among major American companies.

 

Werner von Siemens (1816-1892), founder of the German counterpart to General Electric, had a  different philosophy from Jack Welch. In 1872 he set up a comprehensive pension plan for Siemens’ workers and their families ten years before Germany’s national pension system was inaugurated. Siemens continues to advertise a philosophy of corporate responsibility that it implements in the developing nations where it operates.

 

Formerly socialistic Scandinavian nations were influenced by the United States and the spectacular growth of free-market Japan to adopt market methods in the 1980s. In 1986 Japan temporarily passed the U.S. in per capita income. But the Scandinavians retained high personal income tax rates. Sweden, Japan, and Denmark have the highest top individual rates but Belgium and Germany (a manufacturing powerhouse) have the highest average personal tax rates of 39% (Forbes.com and World Atlas.com). The president and CEO of Siemens has a salary of 1.2 million Euros per year. In comparison, a Wall Street Journal study in 2017 found the median salary of top executives of S&P 500 companies was $12.1 million.

 

In summary, I have no interest in arguments about socialism vs capitalism. However, it seems appropriate to quote one of Aristotle’s principles: virtue carried to excess becomes a vice. I suggest that the U.S. experience in carrying financial rewards for performance to extremes has run afoul Aristotle’s maxim.