It’s happening. California looks likely to put a “one-time” tax of 5% on wealth above $1 billion on the ballot in November, and polls suggest it could pass — despite opposition from some economists (not so surprising) and Democratic politicians (more so). Meanwhile, calls to tax the rich are resounding across the country, from New York’s proposed “pieds-a-tierre tax” to Washington State’s first-ever income tax, imposed only on millionaires.
As someone who has been arguing for more than a decade that these taxes are bad economics, I find all this disheartening. I missed the point. I thought the argument was about the optimal allocation of resources, but it is really about the redistribution of power. I concede that the concentration of power among the wealthy can be harmful. But using the tax code to fix it will create worse problems.
Wealth taxes — that is, taxes on assets as opposed to income — are bad economics because they are nearly impossible to collect, to the point where they are self-defeating and can often result in less tax revenue. They not only discourage entrepreneurship and job creation, but also distort capital allocation. All of this is bad for growth. Still, one of the economists behind the California tax has admitted that it may reduce wealth in the economy overall, but that is a price worth paying because inequality is so toxic.
Other prominent economists argue the problem with wealth inequality is that it makes the rich too powerful: They can lobby the president and Congress to ensure they maintain their status, which can distort markets and policy. This is a fair point! No one elected Elon Musk, who has amassed a lot of power in markets, media and even the government.
At the same time, it worries me how much anger is directed at the wealthy. Increasingly, Americans don’t see self-made billionaires as success stories worthy of admiration. Nearly half of Americans despise them, seeing the wealthy as the beneficiaries of a corrupt system who got rich at their expense.
I can point out, as I have, that wealth creation is not zero-sum, or how much the US economy benefits from companies such as Amazon and the jobs they create. But the anger is there, and it exists for a reason: Many positional goods and services are in short supply. If you’re not wealthy, it is hard to move, or find a home you like, or afford many things that now feel necessary to a middle-class life. There is resentment that the rich live by different rules. They don’t have to worry about paying their mortgage, affording good schools or finding a job with health insurance.
Now we are told all our jobs could disappear — just as the rich who have created the job-stealing technology get richer. The subsequent resentment could tear the US apart, which could be another reason to justify punitive taxes on the wealthy. The result is the societal equivalent of what we economists call a doom loop.
I am not saying that there are no serious issues at stake. My point is that high taxes are not the way to address them. No, Elon Musk does not always spend his money wisely. But I am not convinced the government would do better.
There are at least two other flaws with this rationale for a wealth tax. One is that imposing high taxes on the wealthy won’t necessarily reduce their power; it will simply reallocate it to bureaucrats. True, they are theoretically accountable to the public, but giving them more influence is a recipe for more corruption. At least billionaires are subject to the discipline and transparency of the market and their shareholders. Another flaw is that a lot depends on who decides what counts as “too much” wealth. Maybe it’s $1 billion today, but who’s to say that won’t be lowered over time, or used against perceived political enemies? Appropriating wealth to limit power has certainly not worked well in other countries.
Don’t get me wrong: Taxes are a necessary fact of life. Americans have big expectations for their government, and it doesn’t collect enough revenue to finance itself. The very rich are already paying a lot, but they could pay more. But the principles of good tax policy aren’t about resentment or power — they’re about raising revenue while minimizing distortions, maximizing feasibility and emphasizing salience.
Concentration of power is a problem, especially when paired with a corrupt government. But that can be better addressed by working on the weaknesses and loss of trust in institutions — public, private and those in between. If you think the rich have too much power, fine. But punishing them by making them less rich will only make everyone poorer by reducing growth. And if inequality makes people resentful, a no-growth economy will make them even more so — and miserable besides.
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