Contributor Post Created with Sketch. Elizabeth Warren’s Theory of America’s ‘Freeloading’ Billionaires

 

Sen. Elizabeth Warren says she wants “billionaires to stop being freeloaders.” It’s a statement akin to the idea that billionaires need to “give back” to society. Which is not how I immediately think about the wealth inequality issue. Surely Microsoft co-founder Bill Gates didn’t begin to “give back” or generate value for society only when he began “giving back” via the Gates Foundation to boost education and reduce global poverty. Society benefited from his role in revolutionizing home computing, generating massive wealth for retirement plans everywhere, and creating hundreds of thousands of jobs over the decades.

Oh, and Gates became superrich in the process. And he should pay taxes. Lots of them. Does he or other wealthy Americans pay anywhere near enough? Warren and many Democrats don’t seem to think so, (although paying for new spending does seem to be the primary concern here). Thus the talk of a wealth tax or a higher top income tax rate. There’s less talk on the left, however, of possible tradeoffs from such ideas. A wealth tax would certainly be a theoretically powerful — though difficult to administer and possibly unconstitutional — way to break up or diminish concentrated wealth. (Many nations that have tried them have since abandoned them.) But there is another side of the story. My AEI colleague Alan Viard notes that wealth taxes of the sort Warren advocates “would be a drain on the pool of American savings, [which] finance the business investment that in turn drives future growth of the economy and living standards of workers.” Something to consider at a time when the American economy faces historically low economic growth due to demographics and low productivity.

Another thing to consider: Most of the value created by entrepreneurial innovation isn’t captured by the entrepreneur. And that’s under the current tax system. In the 2004 paper “Schumpeterian Profits in the American Economy: Theory and Measurement,” 2018 Nobel laureate William Nordhaus concludes “that only a minuscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.”

And what do stats about concentrated wealth really tell you about the rest of a society? If the only econ stat you knew about a nation was X percent owned x percent of the wealth, what else could you accurately conclude? For instance: The egalitarian Nordic nations have as many billionaires, relatively, as the US and more concentrated wealth, at least as measured by the share of wealth controlled by the top 10 percent. And while they have higher income taxes, they also have lower corporate taxes and no or minimal wealth taxes. What’s more, the Nordic nations have valued-added taxes as do other big spending advanced economies. It would be wrong to assume poverty in America — down dramatically in recent decades, by the way — is caused by the existence of billionaires, although some on the left seem to draw just such a connection. Indeed, what would we say about the vitality and dynamism of a society that wasn’t producing lots of rich people getting that way through entrepreneurship and business (as opposed to government largesse and cronyism)? As the 2018 Credit Suisse global wealth report notes, “The number of millionaires in a country and its trend over time is often seen as a sign of a country’s economic health and its ability to generate opportunities for wealth creation.”

So what is the point here of the eagerness to increase taxation of the wealthy and superwealthy? An impractical wealth tax is unserious signaling, although it packs more political punch than economically efficient potential alternatives such as consumption taxes (which could also deal with the political power aspect of concentrated wealth, as would making government less intrusive) or raising capital gains taxes and lowering corporate taxes.

There are 12 comments.

  1. EJHill Podcaster

    You’re saying revenge is not a valid theory of economics?

    • #1
    • February 4, 2019, at 10:17 AM PST
    • 8 likes
  2. Flicker Inactive

    I’ll say it again. I knew a doctor from India, who came to the US to work six months out of the year. Every year after six months he hit the top of the tax scale, 100% taxation, in India and it simply wasn’t in his view worth it to work another day. So he came the US and made a lot more money than he made in India. He left because, what are you going to do, make a guy work for nothing? For free? There’s a word for that, the unspoken s-word.

    Even if his max tax rate was 50% in India, the government would still have gotten the same amount of taxes if they had just made it worth his while to stay in his own home country serving his own people. If India had made their taxes progressive to only 75%, he would have stayed and India would have gotten more then than they did under their 100% top rate.

    If this were only a rare psychological quirk of the Indians, to want to get paid (or paid more) for their work, we might be able to ignore it here in the US, but what if everybody is more willing to work in a country that lets them keep more of their money? There might just be a top-end flight of expertise. Heck, people might want to hide their income overseas, or incorporate overseas. This is something both parties (now apparently both three parties) have been decrying for years.

    Freeloading billionaires are a problem, I suppose, unless you tax them into taking vacations after they hit the point in which it is profitless to continue being productive.

    • #2
    • February 4, 2019, at 10:44 AM PST
    • 7 likes
  3. Al French, poor excuse for a p… Member

    It is all posturing. The Senate wouldn’t pass it and the President wouldn’t sign it.

    • #3
    • February 4, 2019, at 1:28 PM PST
    • Like
  4. Old Buckeye Member

    The people who advocate for these taxing schemes always seem to think wealth is a zero-sum proposition. I don’t care how much money someone else makes–more power to ’em!–as long as they’re not stealing from me in the process…which the taxers in Washington are effective at doing. Why is it that none of them ever offers up a big ol’ chunk of their own money as an example of righting the wrongs? And how appropriate is the photo of Warren giving the Nazi salute?

    • #4
    • February 4, 2019, at 1:50 PM PST
    • 3 likes
  5. DonG (skeptic) Coolidge

    I’ll advocate for a wealth tax. This country has a great military and long history of rule of law. All of that exists to protect property ownership and contracts. Without the military and courts and the laws, there would be no wealth. Who should pay for those services? Why not charge a fee that is proportional to the wealth protected? Many people would pay 1% or even 2% annual fee for investment services, so it is reasonable to pay a fee of 1% or even 2% to safeguard that wealth. Who benefits more from the US military, Warren Buffet or some gang banger in Detroit with nothing to loose?

    Since only income can be taxed under the 16th Amendment, unrealized gains could be taxed as imputed income to simulate a tax on wealth. Corporate and personal wage income taxes and inheritance taxes should be zero. We should also have a national sales tax, which could be done as a revenue tax under the 16th Amendment.

    In the Libertarian world, the only acceptable “tax” is a land value tax, which is considered a fee for protecting ownership.

    • #5
    • February 4, 2019, at 7:31 PM PST
    • Like
  6. RossC Inactive

    James Pethokoukis: Thus the talk of a wealth tax or a higher top income tax rate. There’s less talk on the left, however, of possible tradeoffs from such ideas. A wealth tax would certainly be a theoretically powerful — though difficult to administer and possibly unconstitutional — way to break up or diminish concentrated wealth. (Many nations that have tried them have since abandoned them.) But there is another side of the story. My AEI colleague Alan Viard notes that wealth taxes of the sort Warren advocates “would be a drain on the pool of American savings, [which] finance the business investment that in turn drives future growth of the economy and living standards of workers.”

    The challenge to this is that her proposal is wildly simple and the defenses invoked by the tax foundation and AEI are complex. I don’t see how we win this without better arguments. LIKE – Taxing wealth just encourages people to park their money out of US jurisdiction. Or that this tax would create enough revenue to run the government for 4 minutes or something like that.

    • #6
    • February 5, 2019, at 9:25 AM PST
    • 1 like
  7. Full Size Tabby Member

    Were he still alive, Steve Jobs would no doubt fit in the “evil billionaire” category. Steve Jobs made a major fortune off his ownership of Apple stock. But I look at the vast number of accessories other people and businesses sell for Apple phones and tablets and think, “A lot of people not employed at Apple are making a lot of money [benefitting from] the iPhone.”

    • #7
    • February 5, 2019, at 11:57 AM PST
    • 1 like
  8. Full Size Tabby Member

    DonG (View Comment):
    Why not charge a fee that is proportional to the wealth protected? Many people would pay 1% or even 2% annual fee for investment services, so it is reasonable to pay a fee of 1% or even 2% to safeguard that wealth.

    Reasonable in theory, but disastrous in practicality. Might work for investors like Warren Buffet who own liquid assets with markets that frequently establish value, and which can be liquidated as needed to pay the tax. But many of the people targeted for such taxation own a single business (often one that they or their parents founded) that has not value-establishing market (so valuation for the tax becomes guesswork) and is not readily separable to sell off portions each year to pay the tax.

    The British had a wealth tax for landowners in the middle of the 20th Century. To pay it, landowners had to sell off a portion of their estates each year. The real losers were the tenant farmers who never knew year-to-year whether the land the landowner would have to sell off that year to pay the tax was the farm that tenant farmed. 

    Also, unless the income tax is simultaneously repealed, the asset owner has to sell off much more than just the amount of wealth tax owed. A combination of wealth tax and income tax would very quickly eliminate most of the wealth of a wealthy individual.

    • #8
    • February 5, 2019, at 12:13 PM PST
    • Like
  9. Full Size Tabby Member

    RossC (View Comment):

    James Pethokoukis: Thus the talk of a wealth tax or a higher top income tax rate. There’s less talk on the left, however, of possible tradeoffs from such ideas. A wealth tax would certainly be a theoretically powerful — though difficult to administer and possibly unconstitutional — way to break up or diminish concentrated wealth. (Many nations that have tried them have since abandoned them.) But there is another side of the story. My AEI colleague Alan Viard notes that wealth taxes of the sort Warren advocates “would be a drain on the pool of American savings, [which] finance the business investment that in turn drives future growth of the economy and living standards of workers.”

    The challenge to this is that her proposal is wildly simple and the defenses invoked by the tax foundation and AEI are complex. I don’t see how we win this without better arguments. LIKE – Taxing wealth just encourages people to park their money out of US jurisdiction. Or that this tax would create enough revenue to run the government for 4 minutes or something like that.

    “No billionaires, no Apple, no Amazon, no Tesla, no SpaceX, fewer professional sports teams, less PBS television.” [I don’t intend to argue the merits of any of the examples, I just want to bring to life the reality that billionaires create and finance things we use.]

    But, our basic problem is that promising free stuff is simple (and wrong), but reality is complex.

    • #9
    • February 5, 2019, at 12:22 PM PST
    • Like
  10. Flicker Inactive

    I guess it’s easier to have ten small taxes, which can be thought of each as being small, reversible, controllable, tweakable. But the bottom line is how much should each person pay? According to his wealth? Flat tax? Low graduated tax, or high graduated tax? How do supply all the financial assistance to low-income families and still have them keep some incentive to lower taxes, some skin in the game.

    The bottom line, from what I’ve seen, though all this is fluid from year to year, place to place and financial opportunity to opportunity, is that sooner or later, less and less money is flowing in; programs are cut; and those that survive are tied to specific income from guaranteed sources, rather than local taxation. Services degrade to meet the most necessary perceived need of the populace; the only permanent “entitled” expenses are for those closest to the top of the hierarchy with the most control who take whatever else they want off the top first, through their own legislative actions or through corruption.

    • #10
    • February 5, 2019, at 12:39 PM PST
    • 1 like
  11. Full Size Tabby Member

    DonG (View Comment):

    I’ll advocate for a wealth tax. This country has a great military and long history of rule of law. All of that exists to protect property ownership and contracts. Without the military and courts and the laws, there would be no wealth. Who should pay for those services? Why not charge a fee that is proportional to the wealth protected? Many people would pay 1% or even 2% annual fee for investment services, so it is reasonable to pay a fee of 1% or even 2% to safeguard that wealth. Who benefits more from the US military, Warren Buffet or some gang banger in Detroit with nothing to loose?

    Since only income can be taxed under the 16th Amendment, unrealized gains could be taxed as imputed income to simulate a tax on wealth. Corporate and personal wage income taxes and inheritance taxes should be zero. We should also have a national sales tax, which could be done as a revenue tax under the 16th Amendment.

    In the Libertarian world, the only acceptable “tax” is a land value tax, which is considered a fee for protecting ownership.

    I would disagree on principle as well. The founding principles of the United States are that “all men are created equal” and therefore the importance of the federal government is the same to a (currently) poor person as it is to a (currently) rich person. Those cited examples of the military and the rule of law protect the potential of the (currently) poor person to get rich. Hence the original Constitutional requirement (subsequently changed by the 16th Amendment) that “direct taxes” had to be equal on a per capita basis. The US Constitution and the federal government established by that Constitution protects people, not property. A poor person deserves just as much protection as a rich person. Property is protected not because of its own value, but because it is the fruit of a person’s efforts. 

    • #11
    • February 5, 2019, at 6:46 PM PST
    • 1 like
  12. Full Size Tabby Member

    DonG (View Comment):

    I’ll advocate for a wealth tax. This country has a great military and long history of rule of law. All of that exists to protect property ownership and contracts. Without the military and courts and the laws, there would be no wealth. Who should pay for those services? Why not charge a fee that is proportional to the wealth protected? Many people would pay 1% or even 2% annual fee for investment services, so it is reasonable to pay a fee of 1% or even 2% to safeguard that wealth. Who benefits more from the US military, Warren Buffet or some gang banger in Detroit with nothing to loose?

    Since only income can be taxed under the 16th Amendment, unrealized gains could be taxed as imputed income to simulate a tax on wealth. Corporate and personal wage income taxes and inheritance taxes should be zero. We should also have a national sales tax, which could be done as a revenue tax under the 16th Amendment.

    In the Libertarian world, the only acceptable “tax” is a land value tax, which is considered a fee for protecting ownership.

    On the other hand, I think your logic is behind the institution of the income tax. Income may be considered a proxy for wealth. So, people with more to protect (more property generating more income) pay more than people with less to protect.

    Income is not a perfect corollary to wealth. As I noted earlier, some people have significant non-liquid assets which may not generate a lot of income. Other people may have few assets but in one or a few particular years have significant income. But, using income at least uses flowing cash and avoids forcing people to sell assets to pay a wealth tax.

     

    • #12
    • February 6, 2019, at 5:20 AM PST
    • Like