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A Plague of Billionaires?
The United States is awash in crises. The crime rate is surging; inflation continues to rise; COVID-19 is still not tamed; curricular reform is a contentious issue at all levels of education; global warming continues to be the source of much anxiety; the antitrust laws are under strong attack; social media continues to be a flashpoint. But for the readers of the New York Times Magazine, on April 10, 2022—devoted largely to The Money Issue—attacking the proliferation of new billionaires, who now total 735 (or is it 927?) has become the centerpiece of their campaign to reduce income and wealth inequality.
The alarm bells of this trend have been rung by Willy Staley, one of its staff writers, whose lead delivers this supposed knockout punch: “Their numbers are out of control—and the rest of us are subject to their whims.” This makes great copy, but horrific economics. Just why is the increased number of billionaires a bad thing? Theirs is not a coming crime wave in which each of us are put at risk for the loss of our lives or property by a new band of predators. Indeed, the exact opposite is true. Although none of the Times’s writers cares to mention the point, each of these billionaires (or their direct ancestors) created the wealth by selling goods and services to people, which at a minimum had a total value far greater to those people than the fraction of the gain that the billionaires were able to garner for themselves.
These billionaires had to form businesses and share the gains so created with their many partners, employees, suppliers, and customers who fill essential roles in the chain of production and consumption. Perhaps the most important component in this calculation is the consumer surplus—i.e., the maximum price that consumers are prepared to pay for given goods and services, less their market price—a number that is often huge relative to the fraction of the gains that the billionaires retain. As the future Nobel Prize winner William Nordhaus noted, the retained earnings are far lower than commonly supposed, such that since World War II, consumers have collected 98 percent of the social gain from innovation.
The clear inference is that the greater the number of innovators, the greater the social wealth, and the broader its dissemination, a multiplier effect could drive up social gain 50-fold. The dollars in the wallet of ordinary people might not soar, but their level of satisfaction from using those dollars will indeed skyrocket, unless someone thinks that the consumer who (adjusted for inflation) spent $1,000 for an IBM Selectric typewriter in 1970 gets the same level of satisfaction as the modern consumer who purchases a laptop for the same price. If that answer is no, don’t offer the response that these financial gains are offset, for example, by the riskier world in which we live today. Try this OSHA graph for occupational safety:
Fatal automobile accidents, another measure of risk, are harder to track in the past two years, given COVID, but the long-term trends also show a dramatic downturn: “The 2020 rate was still less than one-third the 1970 rate, less than half the 1980 rate, 37 percent lower than the 1990 rate, and 10 percent lower than the 2000 rate.”
At this point, the discussion turns from markets to politics. The main concern voiced by the New York Times is that we might all become subject to billionaire “whims,” as if this motley crew of billionaires acts both arbitrarily and in concert over the full range of political issues. But it is all too obvious that there are as many billionaires on the left as on the right, if not more, so when Jaime Lowe laments that “billionaires can be private about their politics, but their spending gets politicians to listen,” she never asks whether this diverse group of billionaires is seeking to gain unfair preferences from the system or whether they are seeking to prevent an overweening state from enacting some oppressive scheme of taxation or regulation.
Curiously, this billionaire class has been utterly unable to nip in the bud the extensive support for the recent Biden administration proposal to tax the unrealized gains in stocks, bonds, and private corporations that are held by households with at least $100 million in accumulated wealth. It’s a familiar political-economy story: a large number of voters are often able to outspend and outmaneuver a small and isolated political class. As it stands, the net transfer of wealth through the political system is such that the top 1 percent of families pay about 40 percent of the revenue realized from federal income tax, in return for far less in private benefits. This new tax will make the skew even worse by upending the uniform practice that for all taxpayers has always gone in the opposite direction. This well-established practice avoids taxing unrealized appreciation in order not to disrupt the formation, reorganization, or spinoffs of corporations to the extent that they have not distributed cash or other marketable property to their shareholders.
It is not just that these Biden rules will spawn an administrative nightmare. It is that they will force a massive disruption of successful business operations, whether the tax is paid immediately or becomes a lien on the corporation that can be discharged over some period of years. That loss of innovation will reverberate throughout the economy, depressing wages and capital investment across the board—and reducing tax collections nationwide.
Rather than face the consequences of this counterproductive removal, one common response is found in David Marchese’s interview with Thomas Piketty, the author of the famous (but flawed) book, Capital in the Twenty-First Century: that “all wealth is collective by nature.” This sentiment echoes Barack Obama and Elizabeth Warren’s famous war cry, “If you’ve got a business, you didn’t build that. Somebody else made that happen.” The point is an intellectual muddle, for just who is that somebody else? Thankfully, Piketty backtracks, at least momentarily, from this overstatement by noting that development relies on the action of “hundreds, thousands, and millions of engineers, technicians” for the accumulation of knowledge. But that last qualification cuts against his grand claim of collective wealth creation: it pinpoints gains from market transactions as the source of wealth creation, not heavy-handed government interventions.
Piketty then goes off the rails again, insisting that “none of these assets are their assets,” without telling us just whose they are. It is of course necessary to add the caveat that no wealth creation is possible without peace and good order, for which the collection of taxes from the public, billionaires included, is necessary. Yet at no point should it be thought that the rest of society pays for a set of services that the rich gobble up without making any contribution of their own, any more than ordinary people receive these services without taxes from the rich. Instead, a sound system of social relations asks all individuals to contribute to a common fund to create a platform on which a rich array of voluntary enterprises can operate.
It is therefore a mistaken leap to claim that wealth is collective “by nature” or to conclude that we must tax the rich to subsidize the poor. Red flags should be raised against this egalitarian campaign. The standard measure of social welfare asks that new social arrangements create an increase of wealth and/or utility, and whether we can make one person better off without making anyone worse off. By this so-called Pareto standard, there is a social improvement if the rich (or the poor) get richer when no one else gets poorer. Ultimately, there can be social improvements even if the income gaps widen between the rich and the poor; if the sequence is done often enough through market transactions, a rising tide will raise all boats, albeit in different proportions.
In response, it can (and should) be said that an increase in wealth gaps ignores the diminishing marginal utility of wealth. But billionaires, like the rest of us, have figured that out already without any assistance from Obama, Piketty, or Warren. A huge number of major charitable activities are undertaken by rich people of all political persuasions, whether or not they sign the famous Warren Buffett pledge to leave at least half their wealth to charity. But even if the rich hoard their wealth, they are unable to consume it at anything close to the rate of its creation, so that perforce they invest in ways that expand economic growth far more rapidly than any program of government spending.
Piketty and company constantly preach that wealth transfer is the key to growth, but at no point do they look at the alternative. Deregulation (especially at the lower end of the income scale) is a far better way to expand the pie, not taking the risky gambit of shrinking the pie in the vain hope that ordinary people will somehow benefit most in a political environment in which special interests are sure to reach the trough first. First, deregulate; only then think of expanding transfer taxes.
© 2022 by the Board of Trustees of Leland Stanford Junior University.
Published in Economics, Law
Excellent. Much food for thought and, perhaps, action.
Prof. E.: When are we going to get another Law Talk podcast?
Prof E:
We seem to have actively wokeist billionaires and actively libertarian billionaires, but where are the actively conservative billionaires?
I’m starting to think “the envy of money” is replacing “the love of money” as the root of all evil . . .
Couldn’t exactly call Elon Musk ‘conservative’, but he does seem to be very actively free speech.
Marc Andreessen has also been expressing grave concerns about the attacks on free speech.
It is one thing for an individual, billionaire or not, to spend their *own money* on political causes they believe in. It is something else entirely for CEOs and other executives of public companies to use company resources to promote their personal political views…fundamentally, it is an abuse of authority. It may a violation of fiduciary responsibility in some cases, although this would be difficult to prove in court.
Heck, they partner with the government to disseminate leftist propaganda in return for special favors. That’s how they get to be billionaires and remain billionaires.
Shove them away from the public trough, and listen to them squeal.
I’m in favor of every member of Congress being forced to wear the logos of the companies that finance them.
I would label Richard a Progressive. A rather extreme Progressive. Nothing like a Libertarian. The exact opposite.
Why? Because he here essentially praises Progressive and direct taxation with faint criticism..
if he were a true Libertarian he would be screaming bloody murder about the use of taxation to redistribute income rather than to fund government. He expertly describes the horrendous consequences of trying to tax unrealized gains or targeting billionaires, but fails to even mention the profound evils of direct taxation ON PRINCIPLE. He obviously is very comfortable with Progressive taxation in principle and only objects on demonstrably technical adverse consequences.
Richard fails to even broach the disastrous fact that at this time There is no limiting principle whatsoever on federal taxation. Anything—ANYTHING that can get passed by Congress and signed by the President is, by John Robert’s Obamacare decision, Constitutional.
Where are the Libertarians calling for a repeal of the 16th Amendment and demanding an end to All Direct Taxes?
You are failing us mightily, Richard! You are aiding and abetting Leviathan. We want liberty. You don’t.
It’s a single article, Nanocelt. If someone writes their criticism of Policy A but barely touches on B and C, it is a mistake to assume that they are in favor of B and C.
There are plenty of people, some of them billionaires, who have become wealthy in ways other than getting special government favors.
For example, I’m not fond of the politics of Salesforce Inc founder/CEO Marc Beinoff, but I don’t think the success of this company was based on government favors.
Right. But hooking up to the government teat is a pretty sure-fire way of getting/keeping your billions.
There are poor people, there are middle-class people, there are rich people who are all getting freebies from the taxpayers. It is the big government system that is to blame for this, not any one particular economic class.
It’s the same sort of socialized economics that’s never been grounded in math or reality staring people in the face. Wealth transfers, by definition, only move wealth around, there is no net gain. The idea that taking money from one person and giving it to another would increase spending, and therefore consumption, which increases economic activity, ignores the fact that the money would have been spent (or saved) by the first person, increasing economic activity.
The only thing gained is a voting bloc for politicians trying to sell this madness. For public goods, paid thru taxes, the rich pay for far more of that but consume them at a much smaller volume than the non-rich – if anything, the less than wealthy are getting a free ride on the tax coattails of the wealthy who pay for almost everything in terms of income taxes collected.
Piketty gets lost pretty quickly by ignoring the very basis of transactions – if I don’t own my asset, then who does, and now I can’t have a transaction that isn’t controlled or even allowed by the state. This leads to bread lines, and has killed approximately 100 million people in the 20th century. Those deaths are just more math for socialists to ignore while they fly home for the weekend to one of their several houses, preparing next week’s lectures to us on how they think we ought to live our lives.
They’re going about their business, quietly billionairing.
Can you provide for me references to opinions from Richard in which he addresses the evils of Progressive direct taxation and advocates for a return to indirect taxation only as per the original Constitution? I would be delighted to better educate myself. Thanks.
I do not wish to look through all of his articles so I can highlight ones that answer those questions. If you click here, you can see the listing of his articles which have been published on Ricochet. I have read many of his articles and listened to several episodes of podcasts with him, and while I cannot from memory point out which ones dealt with the topic of direct taxation, I am 95% certain that he is opposed to it.
Thanks for the links. The most pertinent one is from Nov 2, 2021, Tax Schemes that won’t pay off.
I eagerly absorb almost everything Epstein writes and says. I have listened to Law Talk for most episodes. To me he is a polymath genius. But he has accommodated himself to reality and does not seek to rock the boat enough on taxation. His Nov 2 post confirms my charges, that he does not seek to roll back the Federal tax regime, which I see as ultimately necessary to restore Constitutional liberty. He is willing to live with the current tax regime. The problem is that he exhibits a failure of imagination as to how much worse things can get, unless some firewall is established to limit federal taxation. He is wrong that there is any restriction on federal taxation. There is not.