|
During the last few years, and especially this year, we have seen a
growing attack on the very wealthy and even, to some extent, the very idea of
wealth. In September, for example, Sen. Bernie Sanders, a leading candidate for
the 2020 Democratic nomination for President, stated “I don’t think
that billionaires should exist in the United States,” adding “I hope
the day comes when they don’t.” He also referred to the current
income and wealth inequality in the United States as “outrageous and
immoral.”
His fellow Democratic candidate, Sen. Elizabeth Warren, whose net worth is $12
million, has also been hostile to the very wealthy. Both she and Bernie
advocate a substantial annual tax on wealth. Warren proposes a 2 percent annual
tax on all wealth over $50 million and a 6 percent annual tax on all wealth
over $1 billion. Sanders proposes a much higher tax on wealth, starting at 1
percent on wealth above $32 million and reaching 8 percent on wealth over $10
billion.
It’s not just Bernie and Warren. Even some prominent economists advocate
substantial taxes on wealth. So, is such a tax justified? Will it have good
economic effects? The answers: No, and no. It’s wrong to take
people’s wealth when they have earned it or even inherited it. It’s
theirs. And a tax on wealth would discourage people from building wealth and
encourage the already wealthy to use their wealth in less-productive ways,
making the rest of us a little poorer than otherwise. So both on grounds of
fairness and economic well-being generally, a tax on wealth is a bad idea.
Fortunately, it’s not just free-market economists like me who believe
this. One of the strongest opponents of a wealth tax, who bases his opposition
totally on the economic effects of such a tax, is former Treasury Secretary
Lawrence H. Summers. Before we consider the economic effects, let’s take a
minute to ponder the philosophical case for and against a tax on wealth. One
case for is that the wealthy got their wealth by plunder. “Behind every
great fortune lies a great crime,” said French novelist Honoré de
Balzac. His implication was not just that wealthy people have committed crimes.
In his book Three Felonies a Day: How the Feds Target the Innocent, criminal
defense attorney Harvey Silverglate argues loosely that a large percent of
American adults are criminals even if they don’t know it.
Silverglate’s book focuses on crimes that businessmen can commit in their
daily business, and virtually every fortune comes out of running or owning a
business. But Balzac wasn’t talking about the penny-ante crimes
Silverglate documents that can get people in legal trouble; that’s why
Balzac used the adjective “great” to describe the crime. What if we
accept Balzac’s claim as true. I don’t accept it, and I’ll say
why anon, but let’s entertain the idea for a minute. What follows from
that? Wouldn’t the best strategy be to charge the criminals with their
crimes? In one of her campaign ads, Warren highlights billionaire Leon
Cooperman, who she claims was charged with insider trading. Put aside the
debate over whether insider trading should be illegal. (For a statement about
why it shouldn’t be illegal, see this.) Notice two things. First, Warren
says that Cooperman was charged with insider trading. But his firm, Omega
Advisers, settled with the Securities and Exchange Commission, paying a fine of
$4.9 million, and admitted no wrongdoing. Did the firm engage in insider
trading? I don’t know. And neither does Warren. But if the SEC had been
fairly confident that it could win the case, it didn’t have to settle.
As noted above, I don’t accept that behind every fortune, or even most
fortunes, is a great crime. Interestingly also, neither does the main economist
who got the ball rolling on wealth taxes earlier this decade. The economist
who, more than any other, made attacks on the wealthy more generally respected,
is Frenchman Thomas Piketty. His 2014 best seller, Capital in the
Twenty-First Century, which, incidentally, made him a wealthy man—by
January 2015, it had sold 1.5 million copies—gave a sustained argument for
heavy taxes on wealth. But even Piketty admits that one can acquire a huge
fortune without committing a crime. Piketty writes, “To be frank, I know
virtually nothing about exactly how Carlos Slim [the richest man in Mexico] or
Bill Gates became rich, and I am quite incapable of assessing their relative
merits.” Translation: even if they didn’t commit crimes, the
government should take a substantial portion of their wealth. Addressing the
possible relationship between crime and wealth, Piketty continues, “In any
case, the courts cannot resolve every case of ill-gotten gains or unjustified
wealth. A tax on capital would be a less blunt and more systematic instrument
for dealing with the question.” Excuse me? A tax on capital is less blunt
than using the legal system to go after those who have committed crimes? That
makes no sense. If the goal is to go after ill-gotten gains or unjustified
wealth, a tax on capital, i.e., wealth, is a completely blunt instrument.
Let’s say you don’t buy my philosophical reasoning about why people
who create wealth deserve it. There’s still a strong economic case for not
taxing wealth. Allowing people to keep their wealth gives them an incentive to
save and invest in capital. The greater the amount of capital, the more capital
there is for workers to use on the job. Remember that capital is not money;
capital is made up of things like plant and equipment. Even a sewing machine is
valuable capital if the alternative is sewing by hand. The greater the amount
of capital per worker, the higher is the productivity of workers. And the
higher the productivity of workers, the higher are real wages. Think about the
productivity of a woman in Guatemala who has a sewing machine versus one who
doesn’t. A tax on capital would cause capital to grow more slowly and,
therefore, would cause real wages to grow more slowly. Which would you rather
have: Bill Gates having built a company that generates products that make
virtually all of us more productive, or Bill Gates, early in the 1980s,
deciding not to grow Microsoft and, instead, taking his millions and buying a
nice house? I’m glad he chose the first option. I wouldn’t be writing
this article on a computer if neither he nor others had bothered to innovate.
You might think that Gates and Microsoft captured most of the gains from
innovating for themselves. Even if they had, we would still be better off as
long as we consumers got a sliver of the gains. It turns out, though, that the
innovators are the people who get only a sliver. In a pathbreaking study in
2004, Yale University economist William D. Nordhaus, who was co-winner of the
Nobel Prize in economics in 2018, estimated that between 1948 and 2001, the
vast majority of the gains from innovation were “passed on to consumers
rather than captured by producers.” Specifically, he wrote, “2.2
percent of the total present value of social returns to innovation are captured
by innovators.” Maybe we should change the Balzac saying to make it more
on target economically. How about “Behind every great gain to consumers is
an innovator.”
One economist who, surprisingly and disappointingly, has said positive things
about taxing the wealthy more heavily is MIT’s Robert Solow. He won the
Nobel Prize in economics in 1987 for his work on explaining sources of economic
growth. In his model, two important sources are capital and technology. And
Solow, to his credit, admits that taxes on wealth would hurt economic growth
and hurt workers. In a 2014 New Republic review of Piketty’s book , Solow
wrote: The labor share of national income is arithmetically the same thing as
the real wage divided by the productivity of labor. Would you rather live in a
society in which the real wage was rising rapidly but the labor share was
falling (because productivity was increasing even faster), or one in which the
real wage was stagnating, along with productivity, so the labor share was
unchanging? The first is surely better on narrowly economic grounds: you eat
your wage, not your share of national income. Translation: If you want labor to
get a bigger share of a smaller output, you might favor taxing wealth. But if
you want labor to get more in absolute terms, you should oppose taxing wealth.
Nevertheless, Solow expresses sympathy for taxes on wealth. In the next two
sentences of the paragraph quoted above, he explains why: But there could be
political and social advantages to the second option. If a small class of
owners of wealth—and it is small—comes to collect a growing share of
the national income, it is likely to dominate the society in other ways as
well. What are those advantages? He doesn’t say. That’s
understandable in a book review, but even Piketty, in a 685-page book,
doesn’t get around to saying how the wealthy would dominate society.
In a recent forum at the Peterson Institute for International Economics,
Piketty’s sometimes co-author Emmanuel Saez of the University of
California, Berkeley, made his case for a tax on wealth and claimed that the
wealthy have disproportionate influence on economic policy. In a segment that
is beautiful to see (from about the 1:07:00 point to the 1:09:30 in this
forum), Larry Summers challenged Saez to give an example where reducing wealthy
people’s wealth by 20 percent would produce better political, social, or
cultural decisions. Summers to Saez: “You’ve been making this
argument for years. Do you have one example?” Saez didn’t.
Summers went on to make the point that very wealthy people can have large
influence by spending a trivial percentage of their wealth. Even heavy taxes on
wealth would leave them quite wealthy. In his earlier presentation on the
panel, Summers made another important point. He considered three activities
that wealthy people engage in. Activity A is continuing to invest it
productively. Activity B is consuming it—for example, by hiring a big jet
and taking their friends to a nice resort. Activity C is donating it to causes
and, if the causes are political, having even larger influence on political
causes than they have now. Both B and C are ways to avoid a tax on wealth; A is
not.
One final note. I know that politicians of all stripes lie, but one highly
misleading line that Warren likes to use is that she’s asking the very
wealthy to “pitch in two cents” line. I’ll put aside the fact
that she really means two percent. She knows that and, hopefully, the vast
majority of her audience knows that. My big problem is the word
“asking.” She’s not asking; that’s not how the IRS
operates. Warren is threatening to use force on those who don’t comply:
that’s the “man with the gun over there” in the Buffalo
Springfield song quoted at the start of this essay. A tax aimed at the wealthy
is a bad idea on philosophical and economic grounds. Let’s hope both
Senators Sanders and Warren pay the price for their proposed assault on the
wealthy and, indirectly, their assault on the rest of us.
|
|
