My friends in the accounting and auditing professions engage in shop talk with me frequently. One of the topics is double entry accounting. When accountants capture business transactions, they make more than one entry in the ledger. They recognize that every business transaction has at least two credit or debit impacts on the financial statements of a company and that at least two entries are required to adequately reflect the transaction.
Likewise, economists know that all transactions have at least one supplier and one buyer, without both there is simply no economic transaction. Non-transactional activities are those that are not consensual on both sides, and we use different language to describe them: fraud, embezzlement, shop lifting, blackmail, taxation, among other words. These descriptors indicate that only a single entity consented and the mirroring entity did not. A Chief Financial Officer who embezzles his company’s cash did so without the company’s knowledge and, therefore, the company could not consent. A young person who smashes the window of a Nike store and takes 5 pairs of popular shoes without paying overrides Nike’s ability to consent. These non-transactional activities are not market based.
Democrats are often outspoken on income inequality. They have a penchant for this issue: that owners and shareholders of businesses get rich at the expense of the poor and the working class. Beyond the typical class warfare argument, Democrats often use economic sleight of hand to make voters think that the rich are doing something unethical and, as a result, must be punished by the government tax authorities.
Consider the previously mentioned Nike example: Phil Knight started his company as Blue Ribbon sports in the 1970’s, which later became Nike. He manufactured shoes that improved the running experience. Over time he expanded to provide shoes to sports beyond running, and added apparel as well. He tapped into the American desire for comfortable performance footwear and apparel for athletes of all levels, followed by an enhanced sense of status with their purchases. Kids wanted the newest, cool shoes and parents rushed to buy them. Having a pair of “Air Jordans” extended status that other shoes just could not match.
Nike’s success at creating demand for innovative shoes and apparel, as well as delivering against that demand created significant success for the company. Knight’s net worth approaches $35 billion, and puts him in rarified air: the Forbes billionaires list. His shares of a highly successful Nike make him the 57th wealthiest man in the world.
How do Democrats deal with billionaires? They have complete disdain for the concept. Many Democrat political leaders, such as Alexandria Ocasio-Cortez (AOC) and Bernie Sanders believe that countries should promulgate significant changes in tax policy to prevent billionaire status. Many Democrats believe that the existence of billionaires is a glitch in the economic system.
One could only come to the conclusion that billionaires are not acceptable if they only look at one side of the ledger. Billionaires accrue profits, but only after they provide value to the market, in the form of products and services. Since the vast majority of billionaires are self made, this is true an overwhelming majority of the time. The visionary spend thousands of hours figuring out what would make our lives better, invest all of their money into an extremely risky project that results in profits 1% to 3% of the time. In other words, they invest everything they own on a business venture with a 99% failure rate.
There are many causes of the 99% failure that a visionary has to overcome. Perhaps he wasn’t as visionary as he thought, the product did not work, the timing was wrong, he could not adequately explain the vision to potential investors, well-funded competitors had the same vision, the visionary could not hire the right people to compensate for his personal weaknesses. The list of contributory causes is long and the failures are real and demoralizing.
Yet, when the next Phil Knight finds his footing, overcomes hundreds of challenges and finally builds a company that becomes the embodiment of his vision, the market rewards him. After 25 or 30 years of maximum sustained effort and risk, the visionary becomes a billionaire.
We could implement a “ledger test” thought experiment on Congress that requires them to tax both sides of market transactions. If they want to raise taxes on billionaire wealth and profits, they must also order the confiscation of the proportional amount of products that were exchanged for the profits. In the Nike example, a 37% tax on Mr. Knight’s profits should also include a 37% confiscation of all the Nike products produced and sold worldwide. After all, if the government is trying to capture one side of the transaction, it is only fair to capture the other as well. Without revenue and profits, production does not exist. These two are tied together existentially.
Democrats do not have policies that would pass the ledger test. While they protest billionaires, they personally have products that billionaires’ companies have produced. Moreover, their electoral base has or uses thousands of products produced by the companies of billionaires: they driveTesla cars, wear Nike shoes, utilize Oracle applications in their offices.
Democrats refer to their objection against billionaires as a moral one. If it is immoral to make a billion dollars by creating and delivering products and services to the market, is it not immoral to make a million to do the same? If it is immoral to make a million dollars, would making $100,000 be any different? Would earning $50,000 be any different? This requires an explanation, something that Democrats don’t provide because they can’t. If the action of exchanging goods and services for cash is wrong, anyone who does it should be subject to criticism at any income level.
Despite their protests, they do have shared loyalty with some billionaires, which is strange given the Democratic Party’s consistent moral criticism of billionaires. Their purported disdain for billionaires is strategic, not ideological. Whipping their political base into a frenzy against the billionaire class aligns directly with other divisive strategies - call out and criticize a small group and pit them against the rest of the country.
Perhaps the country should force Democrats to show both sides of their ledger: Democrats should explain why the rich should be taxed into oblivion, after the market (most of us) already rewarded them for providing us quality services and goods. Further, the onus is on the Democrats to explain why we should route billionaire wealth and profits from quality goods and services to perhaps the worst steward of taxpayer funds - the government.