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The Hottest Tax Ideas on the Left Are Really Bold. Does It Matter That They’re Also Really Bad?
Policy wonks have a soft spot for bold ideas. Doubly so if those ideas are new or making a comeback after years in the wilderness. The New York Times columnist David Leonhardt recently heaped much praise on presidential candidate Elizabeth Warren for her “bold” and “ambitious” agenda that’s appropriate “to the scale of our challenges.”
Voters are no different. Plenty of folks on the left seem giddy about the idea of a “Green New Deal” that would put the US economy on a war footing against climate change. And it’s not just Democrats and progressives. Many on the right fondly recall how Ronald Reagan in the 1970s said Republicans should raise ”a banner of no pale pastels, but bold colors.”
But at some point, bold ideas will collide with boring reality. And the sooner bold ideas are subjected to a reality check the better. Let’s take one of Warren’s biggest and boldest ideas, a wealth tax. It’s a nearly $3 trillion plan involving a two-percent annual tax on wealth over $50 million plus an additional one percent on wealth above $1 billion. She says her plan would raise $2.75 trillion over ten years. Definitely big and bold.
Yet if I were someone initially attracted to this idea as a way of tackling wealth inequality, there would be a few things I would want to consider. For instance: Of the 15 European countries that tried a wealth tax in recent years, only four are still sticking with it. (This piece outlines some of the reasons why the wealth tax is failing internationally.)
What’s more, those seemingly tiny tax rates of two and three percent are deceptive, hiding de facto income tax rates of 67 percent and 100 percent. In a lengthy analysis in The Boston Globe, economists Natasha Sarin and Larry Summers point out that a “50-year-old who has accumulated a substantial fortune can expect to pay more than half of it in taxes before she dies.”
Does that matter if you’re not that rich, middle-aged person? More from Sarin and Summers — who prefer to tackle inequality through more traditional tax reform such as closing loopholes and capping deductions — on the wealth tax and much higher income tax rates:
There is the further point that wealth taxes are likely to be burdensome on entrepreneurial businesses in their private phase, when entrepreneurs are liquidity-constrained. Perversely, this could disincentivize transformative innovation. … Bill Clinton was right when he said that he wanted to see an economy with more millionaires, because that meant an economy with more job-creating successful businesses. Turning the tax code into a vehicle for confronting what some call “oligarchic drift” would undermine business confidence, reduce investment, degrade economic efficiency, and punish success in ways unlikely to be good for the country or even to be appealing to most Americans.
Now a skeptic might see this debate, at least the part happening on the left, as just a way to increase the chances of much higher taxes on the rich. Some Overton Window expansion. (“Sure, Summers is calling for big tax hikes, but at least it’s not that crazy Warren wealth tax!”) Maybe. But at least Sarin and Summers are discussing the potential trade-offs and unintended consequences that flow from big and bold ideas. As should all policy wonks.
Published in Economics
I’m always happy to consider raising taxes on people much richer than I am. But I’m also aware that all their money combined will not be enough to bail us out.
Sounds like when they put a luxury tax on yachts and it put the blue-collar shipyard workers out of business.
Here’s the conservative alternative. Balancing the budget in 2013 with a simple income tax or flat tax would require raising 3.2 trillion dollars and a 30.71% tax rate, according to my (very) amatuer calculations using IRS data. That is without a payroll tax. Compared to a roughly 15% payroll tax, another 16% or so to secure our children’s future isn’t too bad, no?
I like the flat tax. Its the most fair system of taxes – they guy who makes 10x more than me should pay 10x more, not 25x.
In reality you’d also have to curb spending by going to a zero inflation budget or a 1% to 2% deflationary budget. Each year when the congress marks up the budget they include an inflationary factor, and if you propose to spend less on a particular item – its called a budget cut by democrats who cry about meanies cutting the budget – even if its more money than was spent last year.
If you set the inflation rate to -2% the budget could be balanced by economic growth over 10 years or so.
There is no incentive to cut spending, because spending is disconnected from the taxes we pay. There is even a left-wing theory, Modern Monetary Theory, that supports spending without taxes or even borrowing through bonds- literally just print the money.
I agree. It doesnt matter how much the tax rates are. They’ll always spend more. Ronald Reagan had it right –
Modern Monetary Theory has been tried before, in Zimbabwe and Uganda. It did not end well in either case. It would be worse for the US, because the US Dollar is the reserve currency of the world. IF all those reserves suddenly evaporate, the wealth destruction would be global and complete.
Congress guessing at tax brackets and deductions is ridiculous central planning. The process adds no value. It’s negative value. It’s as stupid as anything GOSPLAN ever tried. Furthermore the way it really works is, Congress points a gun at our heads and forces us into an auction for tax brackets and deductions. If you think about it logically I don’t know how you can come up with any other conclusion than it is a destructive process.
Feel free to shoot holes in all of that.
The other thing is, look at what the left is trying to do. They are trying to go beyond taxing a flow of income to other things that are a stock or effectively stock of capital or wealth. Head taxes. Any kind of wealth confiscation. Property taxes are like that, but at least theoretically they directly help the value of the property by paying for police and fire protection etc.
Leftists want to confiscate the Walton family’s money so bad. Well what the hell did they do wrong that we can just all vote on seizing it? What is the end game? It doesn’t even fix anything. It’s ridiculous.
All of this is just a sign a defective system that is going to collapse the hard way some day.
For some on the left, total destruction is a feature not a bug.
Bringing up the National debt and reserve currencies in polite company now is like discussing the housing bubble in 2005. People would respond sympathetically and then change the subject. I knew that it would end badly but was not sure how or when. It’s deja vu all over again.
Here are a couple of good articles about why over spending occurs, social problems from monetary policy, and asset bubbles. I can never get anybody interested in the stuff, but it really affects conservative and libertarian power. The idea that you can use political will to control spending is a complete joke.
http://financialrepressionauthority.com/2017/07/26/the-roundtable-insight-george-bragues-on-how-the-financial-markets-are-influenced-by-politics/
http://adventuresincapitalism.com/2019/03/25/fed-no-stop-raising-rates/
That’s what I think.
Actually Modern Monetary Theory wouldn’t affect the national debt, because they advocate straight up printing the money. Which would eventually cause a hyper inflationary collapse of the US dollar. I thought the federal reserve’s quantitative easing would have been enough to significantly de-value the dollar, they where after all adding 1.3 Trillion a year to the money supply.
The end of this show has a pretty good discussion of MMT.
I think what it comes down to is, they can’t force global holders of dollars to use them in MMT. If it were a closed system, it might work.
Just generally, I get the sense they do a ton of central planning–Force people and capital around–and then they also control inflation with taxation. It’s just got to piss everyone off.
The dollar gets propped up because we have the best economy and all of the other central banks are printing excessively as well. The problem is they are going to be able to reverse any of this. It’s going to get unmanageable.
The other thing is, when the global economy slows down every time a loan denominated in dollars goes bad, that destroys dollars, which makes them more scarce. This is a big problem with emerging market loans. They just cannot let the dollar get strong for that reason. If they let it go up it will wipe out those loans and it will start a feedback loop.
It would be really nice if all Republicans would get their head around this. No republican anywhere has ever done anything about it.
Which is why we are finishing up our days in Tennessee’s countryside. Best we could do, Wyo just wasn’t possible. But we have a refuge for the kids.
”Some day” may be sooner rather than later.
The whole global monetary system has to be overhauled one way or another. That could potentially be very bad for us. In any case, it’s impossible to “manage” the debt to GDP anymore.
It isn’t for everyone, but I really like the Real Vision service and Marc Faber.
Did you mean balancing the budget by 2023 or 2029, since 2013 is history?
I am a big fan of a wealth tax. I think the primary purpose of govt. is to protect persons and property and paying a small percentage (1.5%) is a fair fee for the service provided by govt. Fee for service is a very libertarian idea. The cost of protection people and property including military is about $800B/year. The wealth tax should be adjusted to cover that. In a pure libertarian world, there is no other role for federal govt.
The linked article that says a wealth tax doesn’t work lists mostly countries that don’t control their own currency. Only Switzerland does and their wealth tax works. Having such a tax without having your own currency would be like Florida taxing wealth, but not Georgia. Where would people choose to keep money? Incidentally, I live in Texas. We effectively have a 2% ‘wealth’ tax on real property and improvements. It is collected very efficiently.
The problem is that only income can be taxed for individuals at the national level. Without a constitutional amendment, getting a wealth tax would require some games. Perhaps “imputing” income from wealth changes. This would be like making everyone declare paper gains on investments and properties. Another way would be to tax the states in proportion to population and then let the states “cooperate” on a wealth tax. Beware, people of means will always engage in rules arbitrage.
Inheritance taxes are a disaster. There is no rational basis for repeatedly taxing upon a series of deaths. Better to choose a fee for service, which is fare.
Loping off capital instead of taxing an income flow is very tricky business. There is no good reason to destroy capital, ever.
That’s what it would have taken to balance in 2013, based on actual total income and spending for that year. No charitable, home mortgage deductions. No $7,500 electric vehicle tax credits. No exemptions. My take is “we’re all in this together. This is what this government costs. Can I interest you in something smaller?” Maybe I need to do a post on this.
All of this is worthless central planning. The mortgage interest deduction simply inflates the price of shelter. It’s insane but nobody even asks any basic questions.
If I remember correctly, the big banks just sat on the money that they got from the Fed to shore up their balance sheets, keeping the multiplier effect from causing high inflation. Nonetheless, the dollar has been devalued somewhat if you compare it to hard assets, such as real estate, rather than other fiat currencies. It’s starting to be reflected in wages…
Actually this is a very terrible idea – almost worse than a high income tax or the death tax.
There are plenty of people who have large assets base, and yet are not rich. I am thinking of farmers, ranchers and contractors. Which are mostly smaller family business (although the family farm/ranch is quickly going extinct) farmers and ranchers can easily be sitting on millions of dollars in real estate – and yet struggle to maintain a middle class lifestyle. Same for contractors like electricians and plumbers. To raise 2% of their ‘wealth’ each year would be a significant burden to them.
As sad as it makes me now, if you want to give the government an alternative revenue stream, I would advocate for a national VAT or GST, like Canada has. While I hated it and opposed it when it was first implemented I have come to appreciate its virtues.
The inflation is in the capital markets not the CPI. It’s going to end badly.
I’m against it. I don’t want our nation to go further into debt.
Also, no matter what they do, they raise 18.5% of GDP. The only issues are GDP and how much the government spends. I just thought of that.
Inheritance taxes are a kind of wealth tax, no?
I’m against wealth taxes for the reasons others have stated, but would make an exception for inheritance taxes like we now have. I’m not sure what a “rational basis” has to do with anything. We use reason to justify our actions, not to provide a basis for them.
@rufusrjones Sometimes I just want to ignore reality.
Every semester I find myself telling my students that I don’t really care about originality.
I try to avoid original thoughts myself because what I want is good thoughts, and I figure most of them have already been thought of. The most successful strategy for having good thoughts is to learn them from good thinkers; I have time for that. I may not have time to discover a good original thought.
Lewis is good on this stuff, as usual.
If you have $10M of property and can’t figure out how to make a good income stream on that, sell it to someone else. If nobody can make a good ROI, the price will come down. If people own farms or ranches as hobbies or because they like the view, then pay the price just like people overlooking Central Park or a Pacific sunset.
Why should it come out of their hide, now?