Punishing ‘Extreme Business Success’: Who Does That Help?

 

The most compelling feature of Bernie Sanders’ wealth tax proposal is that it makes Elizabeth Warren’s seem a bit less unreasonable. The Sanders tax is a graduated levy that reaches 10 percent for fortunes over $10 billion vs. the Warren plan’s 2 percent tax on assets $50 million and an added percentage point for wealth over $1 billion. Assuming each tax has been in place since the 1980s, here’s how they would have impacted America’s richest people, according to economist Gabriel Zucman:

Now that’s what I call static analysis. All else equal — even when implementing a massive new tax on wealth creation, including entrepreneurial fortunes? Really? Would nothing else be meaningfully different about the career arcs of the founders of Microsoft, Amazon, Facebook, and Google if they operated under such a taxation scheme?

In a paper on the Warren wealth tax, Zucman and fellow economist Emmanuel Saez are dismissive on any unintended consequences for American high-impact entrepreneurship. They explain that a wealth tax “would reduce the financial payoff to extreme cases of business success” but dispute there would be any loss of “socially valuable innovation.” A wealth tax would really only hurt wealthy owners who have already built businesses and are worried merely about “protect[ing] their dominant positions by fighting new competition.” The assumptions here are plentiful and tightly packed, including the idea that America’s tech titans are no longer innovating and merely trying to preserve market share by squashing rivals.

Moreover, what is the policy failure, exactly, when the story of wealth inequality is largely one of housing inequality? As I wrote earlier this year, “Is the solution legally suspect and administratively challenging wealth taxes or tackling land-use regulations that deter housebuilding and generate fat returns for homeowners? Granted, the latter provides much less cathartic punch for those in need of such emotional release.”

Why take the risk to growth when it’s not clear what problem the wealth tax solves? Do we not want more cases of “extreme business success” as Saez and Zucman put it? Why would we want to do anything to discourage such a phenomenon from occurring? And is there not good reason to think taxes do matter for innovation and high-impact entrepreneurship?

And as I also wrote earlier this year, “A wealth tax also seems out of step with a business-admiring nation, especially wealth generated by building a company that successfully delivers goods and products that people greatly value.” This isn’t plutocratic rhetoric. This sort of societal signaling matters. Economist and historian Deirdre McCloskey writes thusly: “The modern world was made by a slow-motion revolution in ethical convictions about virtues and vices, in particular by a much higher level than in earlier times of toleration for trade-tested progress — letting people make mutually advantageous deals, and even admiring them for doing so, and especially admiring them when, Steve Jobs-like, they imagine betterments.” And get wildly rich in the process.

For more on wealth inequality, please check out this recent AEIdeas online symposium on the subject.

Published in Economics
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  1. David Foster Member
    David Foster
    @DavidFoster

    How were these numbers actually calculated?…Did he just take the assets owned by these individuals in each year and multiply it by 2% or 5% or whatever number applied?  If so, the analysis is wrong, because the amount compounding in each year has been reduced, and this will have a major effect over time.  

    This seems so obvious that the question shouldn’t even need to be asked, but I’ve seen a lot of shabby analyses by supposedly-qualified people in recent years.

    • #1
  2. David Foster Member
    David Foster
    @DavidFoster

    Also:  Even if the analysis was done correctly in a narrow sense, it does not consider the economy-wide impact of the money which would *not* have been invested in new and growing companies by these individuals.

    Progs seem to think that money is kept by wealthy individuals in large piles of currency, a la Scrooge McDuck.

    • #2
  3. Metalheaddoc Member
    Metalheaddoc
    @Metalheaddoc

    Not to mention the fact that super-wealthy people always seem to have a thousand ways of dodging such taxes. Despite Bill Gates’ supposed desire to pay more in taxes, there is no way in hell he would allow nearly 90% of his wealth to have been confiscated in such a socialist scheme. 

    • #3
  4. Arahant Member
    Arahant
    @Arahant

    Another factor is that often, their primary wealth is on paper. A stock certificate might have a face value of $.01 and trade on the market at $100. So, is that $160 billion? Or for tax purposes, is it a mere $16 million? There are always ways to get out of these things.

    • #4
  5. J Ro Member
    J Ro
    @JRo

    David Foster (View Comment):

    Also: Even if the analysis was done correctly in a narrow sense, it does not consider the economy-wide impact of the money which would *not* have been invested in new and growing companies by these individuals.

    Progs seem to think that money is kept by wealthy individuals in large piles of currency, a la Scrooge McDuck.

    It is basically a tax on capital. 

    They do not see, or hope the voters do not understand, the disastrous effects which would result from removing hundreds of billions of dollars from the working economy (e.g. paying salaries and income taxes) and transferring it to the non-productive government.

    • #5
  6. TBA Coolidge
    TBA
    @RobtGilsdorf

    James Pethokoukis: A wealth tax would really only hurt wealthy owners who have already built businesses and are worried merely about “protect[ing] their dominant positions by fighting new competition.”

    If only there were a legislative body that could write laws to prevent unfair competition. 

    • #6
  7. TBA Coolidge
    TBA
    @RobtGilsdorf

    David Foster (View Comment):

    Also: Even if the analysis was done correctly in a narrow sense, it does not consider the economy-wide impact of the money which would *not* have been invested in new and growing companies by these individuals.

    Not to mention the foundations not founded, and benevolence not benevolented. 

    • #7
  8. Cato Rand Inactive
    Cato Rand
    @CatoRand

    I can tell you who these taxes help.  There’s only one group:  the envious.

    • #8
  9. DonG Coolidge
    DonG
    @DonG

    Obviously, any heavy wealth tax (>1%) would result in disappearance of all wealth from US jurisdiction.  Overnight, there would be flight of money and the US would look like Venezuela. 

     

    A thought experiment for Bernie and socialists.  Assume that your goal for an economy is maximizing the long-term prosperity for the typical citizen.  Prosperity comes solely from productivity.  Productivity comes from innovative use of capital.  Thus, the goal depends on maximizing the innovative use of capital.  Who best to direct the use of capital?  Technocrats?  Bureaucrats?  No. The clear solution is to have a contest to see who can demonstrate the best use of capital and then put those people in charge of managing all the capital.  In the end, you have our current system with greatest prosperity creators controlling *lots* of capital.

    • #9
  10. MACHO GRANDE' (aka - Chris Cam… Coolidge
    MACHO GRANDE' (aka - Chris Cam…
    @ChrisCampion

    What’s really interesting here is that the tax revenue generated would be under a trillion dollars.  Like 800-900 billion, in the most extreme example.

    So we’d be at $21 trillion in debt vs. $22 trillion in debt now.  Oh.  OK.  That seems totally worth it.

    Just noted that we’re now servicing debt at 9% of our annual federal budget.  That’s almost 3X what it was just a short time ago, I’d have to look but I think it was around 4-5% under Obama and Bush, but it creeps up annually as the debt grows.

    If 65% of the budget is non-discretionary, and 10% is debt service, everything else becomes vanishingly small, in terms of what we have discretion to spend on.  It’s just going to get worse, faster.  

    https://www.usgovernmentspending.com/federal_budget_detail

    • #10
  11. MACHO GRANDE' (aka - Chris Cam… Coolidge
    MACHO GRANDE' (aka - Chris Cam…
    @ChrisCampion

    Oh, and Sanders is a leech.

    Apologies to leeches, everywhere.

    • #11
  12. Cato Rand Inactive
    Cato Rand
    @CatoRand

    MACHO GRANDE' (aka – Chri… (View Comment):

    What’s really interesting here is that the tax revenue generated would be under a trillion dollars. Like 800-900 billion, in the most extreme example.

    So we’d be at $21 trillion in debt vs. $22 trillion in debt now. Oh. OK. That seems totally worth it.

    Just noted that we’re now servicing debt at 9% of our annual federal budget. That’s almost 3X what it was just a short time ago, I’d have to look but I think it was around 4-5% under Obama and Bush, but it creeps up annually as the debt grows.

    If 65% of the budget is non-discretionary, and 10% is debt service, everything else becomes vanishingly small, in terms of what we have discretion to spend on. It’s just going to get worse, faster.

    https://www.usgovernmentspending.com/federal_budget_detail

    Shhhh.  Don’t tell anybody.  We’re not supposed to notice.

    • #12
  13. Seawriter Contributor
    Seawriter
    @Seawriter

    Cato Rand (View Comment):

    I can tell you who these taxes help. There’s only one group: the envious.

    That is why envy is a sin, and one of the Ten Commandments bars covetousness.

    • #13
  14. Miffed White Male Member
    Miffed White Male
    @MiffedWhiteMale

    Your chart is wrong.  They’d all be worth zero now.

    • #14
  15. Full Size Tabby Member
    Full Size Tabby
    @FullSizeTabby

    DonG (View Comment):
    A thought experiment for Bernie and socialists. Assume that your goal for an economy is maximizing the long-term prosperity for the typical citizen.

    <snark on> That assumption might be beyond Bernie’s capability and imagination. <snark off>

    More seriously, I think long-term prosperity truly is not a goal for socialists. I think “equality” truly is a higher priority goal than prosperity. I have read of surveys in which socialists explicitly choose lower income disparity and lower median income as a better outcome than higher median income that comes with higher income disparity.

    • #15
  16. MarciN Member
    MarciN
    @MarciN

    Arahant (View Comment):

    Another factor is that often, their primary wealth is on paper. A stock certificate might have a face value of $.01 and trade on the market at $100. So, is that $160 billion? Or for tax purposes, is it a mere $16 million? There are always ways to get out of these things.

    Nancy Pelosi is a perfect example of how hard it is to ascertain actual wealth and liquidity: 

    In a nutshell, it all comes down to real estate. As it turns out, she and her husband have been heavily involved in real estate for several years. She actually owns a number of different properties, including several commercial properties that are used as apartment buildings or as office space for corporations. In addition, she has several other properties that can be used as vacation homes or in certain circumstances, homes that are rented out to other tenants. Make no mistake about it, she doesn’t rent what you might consider a typical, modest home out to everyday citizens. The properties that she is involved with are extremely high-end and they bring a premium price. That’s precisely how she has accumulated so much money over the years.

    It’s also worth noting that the $120 million isn’t just counted in cash alone. As a matter of fact, all of the property that she owns is counted as assets in her net worth, so it’s not fully understood just exactly how big her bank account itself is. What is understood is that if she were to need money at a fairly rapid pace, she has a lot of assets at her disposal that she could choose to liquidate. However, money doesn’t seem to be a problem for her so many people speculate that her bank account is fairly large. If you really wanted to break it all down, you could track all of the property she owns and then determine the worth of each one, but most people are willing to take the net worth of $120 million at face value and leave it at that. . . . 

    When wealth is measured in real estate, valuations have to be on the cautious conservative side. That’s why there is such a wide variation in how her wealth is reported–it’s somewhere between $29 million and $120 million. 

    (Looking at this today for the first time in a while, I’m wondering if she had to put all of her holdings in blind trust accounts the way Congress made Trump do. :-)  )  

     

     

    • #16
  17. Goldgeller Member
    Goldgeller
    @Goldgeller

    Others have pointed out the economic implications of the tax here. What definitely stands out to me is that it is hard to measure the counterfactual– of money moving from being invested and creating tons of innovation and wealth to money being given to people who will spend it or save it. Redistribution will most likely make some politically popular subsection of poor people immediately better off in the short run. But will lead to less overall growth, leaving all but the rich less well off in the intermediate and long run. Though I doubt the economy will crash or anything. 

    For me, the big issue is the political effects and its connection to the economy. Once you get a new transfer program or a new spending program we 1) won’t be able to end it– we will ratchet upwards the expectation for baseline income/consumption  and we 2) will create an incentive to compete over who can give out even more. Whatever a family making over 30% of the poverty line gets under Pres Warren or Sanders will not be enough come midterms or their reelection. We will need to do more. And cutting the program will be tantamount to killing people or something. So this is an economic and political nightmare. 

    • #17
  18. Miffed White Male Member
    Miffed White Male
    @MiffedWhiteMale

    MarciN (View Comment):

    Arahant (View Comment):

    Another factor is that often, their primary wealth is on paper. A stock certificate might have a face value of $.01 and trade on the market at $100. So, is that $160 billion? Or for tax purposes, is it a mere $16 million? There are always ways to get out of these things.

    Nancy Pelosi is a perfect example of how hard it is to ascertain actual wealth and liquidity:

    In a nutshell, it all comes down to real estate. As it turns out, she and her husband have been heavily involved in real estate for several years. She actually owns a number of different properties, including several commercial properties that are used as apartment buildings or as office space for corporations. In addition, she has several other properties that can be used as vacation homes or in certain circumstances, homes that are rented out to other tenants. Make no mistake about it, she doesn’t rent what you might consider a typical, modest home out to everyday citizens. The properties that she is involved with are extremely high-end and they bring a premium price. That’s precisely how she has accumulated so much money over the years.

    It’s also worth noting that the $120 million isn’t just counted in cash alone. As a matter of fact, all of the property that she owns is counted as assets in her net worth, so it’s not fully understood just exactly how big her bank account itself is. What is understood is that if she were to need money at a fairly rapid pace, she has a lot of assets at her disposal that she could choose to liquidate. However, money doesn’t seem to be a problem for her so many people speculate that her bank account is fairly large. If you really wanted to break it all down, you could track all of the property she owns and then determine the worth of each one, but most people are willing to take the net worth of $120 million at face value and leave it at that. . . .

    When wealth is measured in real estate, valuations have to be on the cautious conservative side. That’s why there is such a wide variation in how her wealth is reported–it’s somewhere between $29 million and $120 million.

    (Looking at this today for the first time in a while, I’m wondering if she had to put all of her holdings in blind trust accounts the way Congress made Trump do. :-) )

     

     

    I believe we should have a wealth tax on members of Congress – 90% of the amount their net worth increases each year beyond the amount  of their salary.

     

    • #18
  19. Seawriter Contributor
    Seawriter
    @Seawriter

    As I recall, this type of tax was used to ransom Richard the Lionhearted. The government went into everyone’s house and seized 1/4 of their wealth, as measured in movable property. If you lacked the cash (and many did back then) they seized good: 1/4 of your chairs, dishes, spoons, knives, bed linen, clothing, etc.

    So the best you can say about this proposal is that it is literally (not the Joe Biden literally, but in reality, literally) a medieval idea.

    More proof of my assertion that Progressivism is about reviving feudalism and returning us to the Middle Ages.

    • #19
  20. Jerry Giordano (Arizona Patrio… Member
    Jerry Giordano (Arizona Patrio…
    @ArizonaPatriot

    I don’t disagree with Mr. Pethokoukis, as far as his argument goes, but he does not make a moral argument at all.  The argument that “immorality leads to good results” is not very persuasive.

    The moral argument is “thou shalt not steal.”

    Even this argument cannot be taken too far, as I do believe that some taxation is both necessary and legitimate.  It seems to me that the moral line is crossed with the welfare state idea that some people should be taxed not to provide legitimate public goods, but to provide money, goods, or services directly to others.

    • #20
  21. Cato Rand Inactive
    Cato Rand
    @CatoRand

    Miffed White Male (View Comment):

    Your chart is wrong. They’d all be worth zero now.

     

    Actually, the chart is wrong because it purports to list the richest Americans, and it’s a safe bet most of these people would have ceased to be Americans in Liz or Bernies’ world.

    • #21
  22. TBA Coolidge
    TBA
    @RobtGilsdorf

    MACHO GRANDE' (aka – Chri&hellip; (View Comment):

    What’s really interesting here is that the tax revenue generated would be under a trillion dollars. Like 800-900 billion, in the most extreme example.

    So we’d be at $21 trillion in debt vs. $22 trillion in debt now. Oh. OK. That seems totally worth it.

    Just noted that we’re now servicing debt at 9% of our annual federal budget. That’s almost 3X what it was just a short time ago, I’d have to look but I think it was around 4-5% under Obama and Bush, but it creeps up annually as the debt grows.

    If 65% of the budget is non-discretionary, and 10% is debt service, everything else becomes vanishingly small, in terms of what we have discretion to spend on. It’s just going to get worse, faster.

    https://www.usgovernmentspending.com/federal_budget_detail

    I hate the very concept of discretionary spending at the federal level – like they’re teenagers who require walking-around money

    • #22
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