business in brief

Why the world needs rich people?

13.05.2013 | Ivan Vorontsov

Poverty, wealth and social inequality appeared along with the notion of private property as soon as people transitioned from a primeval lifestyle to agriculture. The notion of the perversity, immorality of inequality and the proposal to take away and share are as old as time immemorial. An interesting study on the always relevant topic of why the world needs rich people was published in the German economic journal Wirtschaftswoche

On solidarityand taxes

Serious political forces of the modern world, including the left, do not call for total de-kulakization and equality in poverty any more. Instead, they speak about solidarity. We are concerned that the rich also make their contribution to financing of publicly required institutions, says Sigmar Gabriel, leader of the Social Democratic Party of Germany. In truth, this is a concealed populist appeal to the old brutish instincts, primarily envy. In Germany, already now 1% of the richest people pay 25% of all income taxes collected in the country. Meanwhile, 10% of the most well-to-do pay 55% of the income tax. Economists and the environmentalists are demanding that the maximum income tax be raised from 42% to 49%. This is dangerous since it threatens a decrease in investments and the loss of jobs. As it has been calculated, every new percent of the income tax means the unemployment of 200,000 people. The problem of ostensibly excessive wages of top managers is also considered farfetched. It is clear that an owner of a company will not pay a manager more than he or she deserves. The government needs to think not about increasing taxes, but cutting expenditures, says Chairman of the Association of German Chambers of Industry and Commerce and co-owner of lba Eric Schweitzer.

Cash cows or draft animals

We need rich people not to leave the country so that we have at least a couple of rich men in the future, said German Chancellor Angela Merkel. That the society needs rich people does not raise arguments. The question is why? Socialists want to turn them into cash cows who will take on the heavy burden of overcoming the crisis. The socialists tend to demand patriotism from the rich implying their willingess to pay, arguing that the rich owe it to social projects, a functioning rule-of-law state and a prosperous society for their own well-being. That is why the leftists do not limit themselves to the idea of raising income taxes; they want to mpose a property tax, limit the rights of heirs and dividends from inherited capital and finally care about management of excess earnings that would be beneficial for society.

The right-wing forces have a different approach. They remind that the rich pay more than half the taxes anyway and present them as powerful draft animals the energy and will of whom are making a better future for the country. Capital is a timorous deer, which is why the rich people need protection from the greed of politicians and the envy of the masses, assure right-wing politicians. The problem is that the proposals of the left and the right, who are not likely to reject the idea of progressive taxation in Germany, for instance, increasing the burden not on the wealthy, rather on the middle class lawyers, doctors, scientists, engineers, top class craftsmen and managers who also have decent incomes.

As for the real moneybags, they were extremely important for the national economy in the past. 300 years ago, French philosopher Charles de Montesquieu rightfully noted: Luxury is a necessity. If the rich people stop spending a lot of money, the poor will die from hunger. The needs of the elite facilitated the development of crafts, while the love of the nobility for silk, china and jewelry was the driving force of world trade. In modern society the ubiquitous well-being of the rich as consumers is not so high and they can no longer be viewed as the locomotives of progress. Today, the middle class fulfills this function and is essentially transforming into societys cash cow.

Does money stink?

Wirtschaftswoche responds to this question: In the end, yes. T here is naturally a difference whether a person created their wealth through hard labor, criminal activities or thanks to luck or a hefty inheritance. There is also one more important thing, namely how a person views their material status and where they spend their money. The government needs to separate good wealth from bad, illegal wealth. That is why a wise policy must be based on three principles. The first one is consistent observance of laws, prosecution of swindlers and adoption of international laws prohibiting unfair tax competition through offshore zones. The second is to reduce the tax burden, including high incomes earned by hard labor, but increase the luxury tax and unproductive capital that exclusively serves consumption. Successful people that make their contribution to the common well-being of people should be rewarded.

Who should be thought to be rich?

The dividends from property and capital of the wealthy person and not just those with substantial savings are higher than the wages of the majority of people and those who can afford to not work at all. It is very difficult to calculate this figure to the penny. Here are some statistics: in 2013 Forbes reported there were 1,426 billionaires in the world (10 in Ukraine). According to data of the Global Wealth Report Credit Suisse, 29 mn millionaires own 40% of all property on the planet. In the U.S., the total wealth of the top 400 richest Americans increased last year by 13% to US $ 1.7 trillion. The aggregate wealth or assets of private households in the world is US $223 trillion. A person who owns property (including real estate) to the tune of US $71,000 is categorized among the richest 10% of the worlds population. When a person has US $3,710 they are considered a representative of the global middle class. Half of the people in the world have less. Combined over 3.5 bn people own only 1% of the worlds property. In order to be among the richest 10% of the population in Europe, a person should have EUR 200,000, in Africa EUR 5,400 and in India EUR 4,175. In Ukraine, there is no specific data, but according to some assessments EUR 100,000 is sufficient to be in the top 10%, primarily due to the high prices of apartments in large cities.

Money makes money, poverty breeds poverty

A city without rich people is a sad place, writes Wirtschaftswoche and gives an example not of an African ghetto, but an ordinary German town. Stendal, a county center with a population of 40,000, is one of a few towns in Germany that has no rich people. Statistically, there are 950,000 euro millionaires living in Germany or 1.2% of the population. In Stendal, there should be 480, but in reality there are none. The city looks very grim. While the towns residents are not poor, there are no signs of success. Althout there are no wealthy people in the town, it does not boast any places of attraction, such as theaters, luxury restaurants and a community where they can show their worth. Accordingly, it is not likely that a rich person would want to live in Stendal. The fact is there is nothing to do there. It is like a vicious circle.

Should the government fight inequality?

Everything depends on a specific situation. With excessive inequality, the poor will not get an education and their capabilities are not in demand in society, Wirtschaftswoche argues. Milan economist Roberto Perotti established that low incomes lead to an increase in birth rates among the poorest strata. People hope that children will work from an early age and bring money for the family. Thus, the quantity of the uneducated slave labor force is growing and this is an obstacle to progress. The more unequally the incomes of the population are distributed, the less attractive a country becomes for business. When the majority of the population lives in poverty, there is no market for selling goods.

Finally, inequality facilitates political instability and growth in the crime rate. There is no natural way out of this situation. Therefore, in a poor country inequality inflicts damage on growth and progress, while government policy of profit redistribution is useful. In a rich country, conversely, redistribution slows down progress.

A monks point of view

Wirtschaftswoche publishes a commentary of a Benedictine monk and publicist Notker Wolf. Wealth is a complicated and multivalued notion. For a person, not only material, but also non-material values, such as knowledge, peace of mind and belief in God are important. Speaking about the ethics of richness, it is necessary to thoroughly formulate what it is. At the moment, it is more commonly used to describe excessiveness and life in the lap of luxury, but in truth wealth is a combination of material and spiritual values. The church recommends people to aspire towards poverty. The Savior said that a camel will sooner pass through a needles eye than a rich will go to heaven.

On the other hand, there is a parable in the New Testament of a servant who multiplied the money he received from a landlord and was praised for that. This means that Christianity does not consider wealth a sin. On the contrary, it is a persons duty to use and realize ones abilities for the sake of multiplying ones personal wealth, which is good for society in general.

Some psychology

Here is an example of ambition: Saudi prince Al-Walid filed a lawsuit against Forbes, when the magazine placed him in the 26th position on the list of the worlds richest people with an estimated wealth of US $20 bn. Only 26th place?! This cannot be! The publication has downgraded my rank and wealth. This is insulting, said the prince. The passion to compare oneself to others is typical of human beings. The notion of standards of living is relative, because psychologically it is more important for people to live better, or at least not worse, than others.

American scientists Sara Solnick and David Hemenway asked people: What would you choose? Option 1: you earn US $50,000 a year, while all others earn US $25,000. Option 2: at the same level of prices your annual income is US $100,000 and everybody elses - US $200,000. The majority preferred the first option. It is the desire to live better than others that pulled people out of the caves.

On the other hand, wealth does not bring absolute happiness, particularly if it is unexpected and unearned, like winning a lottery. A person gets used to the change in financial standing and considers it a matter of course. Interestingly, according to some studies, for instance the Happy Planet Index, the happiest countries (Colombia, Costa Rica, Vietnam) are by far not the richest in the world. So, does money bring happiness? It depends, including how a person spends it, answers Wirtschaftswoche. If you need happiness, it is best to acquire not material values, but impressions. People often regret spending money on cars, homes, furniture and much less on trips, communication and concerts having drawn such a conclusion, researcher Emily Rosenzweig decided not to refurbish her kitchen as she planned, but instead went on vacation to Mexico on the money she had saved up. The most important thing is that a wealthy person can be unhappy, but it is quite difficult for the poor to be happy.

What would Adam Smith say?

Adam Smith, a Scottish philosopher of the 18th century, is believed to be the founder of economic liberalism. What would he have to say if he gave an interview to Wirtschaftswoche in 2013? An increase in personal capital means the growth of a nation and a states well-being. Growth is good for all, including the poorest, while stagnation or recession is bad for all. In a growing economy even an unskilled worker lives better than in a regressing economy. It is individual interest, not abstract altruism that is the locomotive of growth of personal well-being. Aspirations to personal benefit drive a person to use the capital where it is most useful for the country in general. That is why we need the rich. While the human soul is inherently complex, it can indeed can have selfless reasons when a person does good unto others for nothing and for their own satisfaction, said Smith.

A good example of altruism guided by egoism is Peter Daniel Porsche, the 39-year old great grandson of the famous car designer Ferdinand Porsche who owns a stake in Volkswagen estimated at over one billion euro. He receives millions in dividends every year and spends 80% of them on social projects. He lives with his wife and four children in a modest apartment in Salzburg. No, I dont give alms to the poor drunks on the street. I sponsor 160 socially beneficial projects. A special school for children with psychic problems is the most important one for me. I spent around EUR 6 mn for its construction in Salzburg and send EUR 600,000-800,000 every year to cover its payroll and other expenses. Why do I donate money? Out of egoism. Because I feel better that way.

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