THE BLOG
07/18/2013 05:48 pm ET | Updated Sep 17, 2013

How the Rich Actually Create the Need for Entitlement Programs

I find it ironic when the rich complain about entitlement programs that benefit the middle class and poor, since it is the attitudes and policies of the rich that have led to an increased need for such programs in the first place.

In our system of capitalism, the primary purpose of an individual's work is to maximize profits for himself or herself. In theory that is fine, except that individuals do not exist in a vacuum and rely heavily on shared resources and public infrastructure in order to be able to work or run a business, and to reap the benefits. Without the cooperation of colleagues and employees, without the roads, subways, utilities and other public amenities that make our nation work, and without the legal framework that protects private property, commerce in America would not be possible at all.

What this means is that while profit maximization is an acceptable goal for an individual, it cannot be the only goal and must be balanced against the needs of society and the nation. Unfortunately, though, we are moving in the opposite direction, and fast.

Both income inequality and the wealth gap in America are exploding. The Gini coefficient, which measures income inequality, is 47.7 for the US compared to 20-35 for other developed nations. What this means is that the US is already halfway to the point where one rich person has everything (absurd as that might sound), and leads the world in inequality. This corresponds roughly to the fact that the top 1% of Americans own 42% of the entire wealth of the nation, and the next 4% own another 30% of the wealth.

This type of imbalance occurs because of: 1) The ability of the rich to reinvest a larger share of their income and generate even more passive income and wealth; 2) Lower tax rates paid by the rich on investment income than by other Americans on ordinary wages; 3) Considerable tax benefits of offshore banking and other loopholes that only the rich are in a position to enjoy, and; 4) Excessive executive pay facilitated by a rigged system of corporate compensation. But whatever the reasons for it, the bigger problem is that growing income inequality and wealth concentration are creating a greater need for lower income citizens to depend on entitlement programs, which puts pressure on the entire system.

Let's face it. A certain amount of inequality is an unavoidable side effect of free enterprise. However, when the side effect of a process becomes extreme enough, it starts eroding the benefits of the process itself, which is what is happening now. The same competitiveness that drives our economy is now in danger of crippling it, as the personal greed of some individuals compromises the interests of the wider population and adds to the national burden.

In a perfect world there would be no need for entitlement programs, but that cannot happen when the income gap is wide, cost of living is high, and wealth trickles upwards. When wealth is distributed as unevenly as it is in our society, it is inevitable that people will depend heavily on the government to be able to afford food, shelter, medical care, and other essentials. If the rich were willing to pay the taxes required to fund this system, there would be no problem, but as is becoming increasingly evident, the wealthiest people and organizations in our economy contribute strikingly little to the treasury (Mitt Romney and Apple may jump out in this regard but they are merely the tip of a very large iceberg).

This situation is not sustainable and must change. Either the rich need to alter their attitudes towards the sharing of wealth, or accept that entitlements are an inevitable part of our capitalist system and be willing to support that system financially. The very reason that wealth needs to be redistributed in this way is because it is being distributed with gross unevenness right now.

Intelligence and innovation may be the keys to economic progress but so is simple human labor; and those who are smarter, luckier, and more successful than the rest should recognize the perils of selfishness and exhibit more generosity and fairness in their approach to business.

Otherwise we can expect nothing but ballooning deficits, destructive budget battles in Washington, and increasing misery for the majority of Americans.

SANJAY SANGHOEE is a political and business commentator. He is a banker, has an MBA from Columbia Business School, and is the author of "Killing Wall Street". For more information, please visit www.killingwallstreet.com