Kentucky Wealth Distribution

by Jim Ramsay

Recently on the PBS program Kentucky Tonight, there was an enlightening discussion of proposed tax law changes in the state. The lessons however go far beyond Kentucky and illustrate both the tactics (a classic logical fallacy: appeal to pity) and underlying problematic philosophical constructs of redistribution of wealth.

Kentucky State Representative Jim Wayne gave an example of a maid making $7.15 per hour to clean hotel rooms. He said that the current federal “earned income tax credit” brought her salary up to $8.50 per hour. He was proposing a state earned income tax credit that would raise her salary to $9.00 per hour. As often is the case, this argument sounds kind, generous, and compassionate. On its surface, the argument portrays two characters: the poor downtrodden worker and the benevolent government bestowing symbolic bread to the poor. However, as is the case with any forgotten man problem, this example only tells part of the story by leaving out a key player in the tale. That participant is known as the forgotten man.

To analyze the argument, we need to first evaluate its components.

We begin with his subject: the job of cleaning a hotel room. This job, while physically taxing, probably takes 90 minutes to train someone to thoroughly perform the tasks required. The wage for the job the market sets at $7.15. The majority of the work force would be capable of filling the position. Therefore, given the large supply of potential workers as compared to the number of hotel rooms to clean, society and the market have valued the position at this rate.

The next component of his argument is the earned income tax credit. This sum of money is paid directly to the worker from the federal government. Despite it being called a “refundable” tax credit, it was never paid by the worker in order to be refunded. Rather, the worker receives a direct payment from the government in addition to a refund of any income taxes they paid. Similarly, the representative was proposing a state earned income tax credit where the state would send additional money to the worker.

This brings us to the next actor in the story: the state. The state produces nothing nor does it print money; therefore, the only source for this payment is taxation. When we look at taxation, first we will address the source. The representative was an advocate of a “progressive” tax code, meaning that he wants to “target” (his word) the highest earning workers. Each of these targets is the forgotten man.

Salary surveys show the highest paid jobs include doctors, lawyers, business owners, business executives, etc. For the sake of argument, we will look at two: the most respected, doctors, and one of the most vilified, business executives. In each case, we begin with a requirement for intelligence. Follow that basic intelligence with years of education and residency, often taking 12 years of training for the doctor. In the case of the business executive, the educational requirement often includes an MBA for a total school time of 6 years. There are usually years of internships and working up through the ranks for the position. In both cases, we see lengthy training periods with high education costs and the debt that goes with it. Based on the intelligence, education, study requirements, and specialized skills, the percentage of the population capable of filling these types of responsibilities, is extremely small. We do not choose doctors or business executives by drawing lots; those interested in those positions possess not just natural skills, but perform years of work, education, and skill development. Society and the market values these positions at the top of the salary range.

Now that we understand the players, we need to look at the core of the argument. What the representative was saying was that the free market and society are wrong and unjust. He was saying that that the eye surgeon who returns our sight is paid too much while the person who vacuums the floor in a hotel room is paid too little. He wanted to reduce the reward for the excellence and years of hard work and commitment of one person to transfer to another with an hour and a half of training. One key is that the market determined those wages. The representative has decided that; if a business produces higher quality products due to the decisions of an executive, and millions of consumers judge with their dollars to purchase the better product, those millions of decision makers were wrong: instead, a small group of planners second guess those millions and confiscate those dollars to provide largess in the form of a “credit” to whomever they wish. Are the planners and the politicians correct, or is the market correct in their free exchange of value for value?

Beyond the core argument, there are ancillary issues with this proposal which could be explored at another time. Examples include the fact that in between the “target” of the taxation and the beneficiary of the largess lay a massive bureaucracy that devours a significant percentage of those dollars; compliance costs of satisfying the tax code, opportunity costs of tax shelters, and other political manipulation. This argument results in the state placing an albatross around our neck. To say it more plainly: these all add up to a massive destruction of effort.