One Way ‘Abolishing Billionaires’ Would Undermine Silicon Valley and America’s Entrepreneurial Ecosystem

 

Sundar Pichai, Chief Executive Officer of Alphabet, speaks during a session of the 50th World Economic Forum (WEF) annual meeting in Davos, Switzerland, January 22, 2020.

I mean, so what if a wealth tax took half of American billionaire wealth over the next decade or so? Or what if it took more? All these folks would still have plenty left to spend — which is why some democratic socialists would prefer a much, much lower wealth cap. As a policy adviser to Rep. Alexandria Ocasio–Cortez has said, “If you have $5 million, you can live off the interest of that and be a one-percenter. There’s nothing in this world that anybody wants or needs to do that you can’t do with, let’s say, $10 – 15 million.”

Nor should we worry that vast wealth confiscation would hurt innovation and entrepreneurship — what economists Emmanuel Saez and Gabriel Zucman call “extreme business success.” Most rich and successful entrepreneurs would be, well, still rich and successful entrepreneurs before getting hit by the billionaire tax. As the two inequality researchers put it, “Established businesses typically devote a lot of their resources to protect their dominant positions by fighting new competition. A progressive wealth tax hits wealthy owners who have already established their businesses while it does not affect (yet) new emerging businesses.”

Really? Was Amazon really just resting on its laurels in 2000? Hardly. It was still an upstart retailer whose best years were still ahead (Amazon revenue was $2.8 billion in 2000 versus $280 billion in 2019) — well, after navigating the dot–com bust and avoiding disaster. But what if founder Jeff Bezos had been hit by a big wealth tax in 2000? As University of Chicago economist Steven Kaplan explained in a debate with Zucman:

Jeff Bezos was worth $4.7 billion or $5 billion in 2000, at the peak of the dot.com bubble. Amazon hadn’t really succeeded then.… So if you would put a 5 percent wealth tax on him when it was $5 billion, that’s a $250 million tax. By the time he would probably get around to paying it, which would be June, his shares were worth 2.5 billion. So now to get the $250 million, he would have to sell 10% of his shares. But then oops! But we have a 50% capital gains tax. Got to sell 20 percent of my shares. So in six months, under this plan, he would have to sell 20 percent of Amazon in that situation. Which would probably — what would that do to the stock price? Probably drive it down further. So maybe 25 percent of Amazon. Do you want Jeff Bezos to be selling 25 percent of Amazon? In 2000? Then you wouldn’t have Amazon, there wouldn’t be ton of innovation.

Kaplan also explains how wealth taxes would hurt America’s deep economic magic of innovation and entrepreneurship by gobbling up the funding for new ventures:

Let me tell you about Elon Musk. Elon Musk was an entrepreneur and he started PayPal, and when PayPal got sold, Elon Musk got $250 million pre–tax. That left him with $180 million after tax. What did he do with that $180 million? He pumped a $100 million into SpaceX and $80 million into Tesla, basically put all his PayPal money into SpaceX and Tesla. What happened in 2008? They almost both went bankrupt. They both were on the precipice of surviving, and they survived. Now, I would argue that if we had put in a higher marginal tax rate on capital gains, he would have had — and the numbers are in that book — he would have $60 million less, and either SpaceX or Tesla would not exist. And I don’t think anyone else would have done it…. You can tell the same story with Pixar. Steve Jobs got his money from Apple, he left Apple, and he put a big chunk of it into Pixar. It also almost went bankrupt, it didn’t, and if you had taxed him more, he would have had to have sold Pixar. It wouldn’t have been Pixar. You would have “Losing Nemo” instead of “Finding Nemo.”

It’s a common theme that runs through all these radical, “big structural change” agendas: the idea that you can massively change one key part of the US economy with few negative tradeoffs. But severely undermining America’s high-impact startup ecosystem is a significant negative tradeoff.

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

    James Pethokoukis: As a policy adviser to Rep. Alexandria Ocasio–Cortez has said, “If you have $5 million, you can live off the interest of that and be a one-percenter.

    What does this policy adviser think the interest rate is?

    • #1
  2. Gossamer Cat Coolidge
    Gossamer Cat
    @GossamerCat

    Thank you for laying this out.  All many of us see are the big numbers and think, who needs all that money.  It is true, that for personal consumption there is a limit.  But one year when I was hit with a particularly large tax bill that was unexpected,  I went around my house muttering about all the things I would not do with that money: I would not put it into my start up; I would not donate it to charity; I would not give my cleaning lady a raise;  I would not renew my newspaper subscription;  I would not help fund my niece’s college education.  Small potatoes compared to Space X but an illustration of what high taxes do.  

    • #2
  3. RushBabe49 Thatcher
    RushBabe49
    @RushBabe49

    The so-called “inequality research” is the biggest bunch of BS ever perpetrated on the academic/economic community.  It is the Politics of Envy writ large, and no one operates the way those “researchers” propose.  If they had a brain in their heads, they would know that inequality is good, and necessary for human society.  How else are people to strive for anything, if they can’t increase their wealth?  Someone has to be wealthier than you, for you to want to be that wealthy, and work toward greater wealth.

    • #3
  4. Hang On Member
    Hang On
    @HangOn

    Who cares if there were no Tesla or Spacex?

    • #4
  5. ToryWarWriter Thatcher
    ToryWarWriter
    @ToryWarWriter

    These people need to read Taxation a Peoples business.

    • #5
  6. lowtech redneck Coolidge
    lowtech redneck
    @lowtech redneck

    I don’t actually disagree with the gist of the article, but the phrase ‘undermining Silicon Valley’ makes me want to.

     

    • #6
  7. OccupantCDN Coolidge
    OccupantCDN
    @OccupantCDN

    Hang On (View Comment):

    Who cares if there were no Tesla or Spacex?

    Spacex and Tesla are aberrations in silicon valley in that they make physical products, frankly I think its because the physical world has been so highly regulated, that investors look to software (and internet) products where they have the freedom to innovate without regulator interference.

     

    • #7
  8. I Walton Member
    I Walton
    @IWalton

    If without any prior knowledge the government could for one time take a huge chunk of the super wealthy’s assets, there wouldn’t be many distortions we could know about.  But if billionaires are aware of what’s going to happen, they would have time to move assets, sell them and move the money,  undertake all kinds of wealth adjustments that would almost certainly work and require even more drastic interventionist policy adjustments to undo.  There is no way to do this without major distortions while not gathering much revenue.  On the other hand making our tax code really simple and low with no escape, and no incentives to find such escapes we’d gather more revenue and distort the economy less.  A flat consumption tax for instance could be avoided by not consuming much, but the funds remain invested and the market doesn’t care where the funds originate.

    • #8
  9. Ralphie Inactive
    Ralphie
    @Ralphie

    Reminds me of William Graham Sumner’s “The Rich are Good Natured” which starts out like this:

    I have before me a newspaper slip on which a writer expresses the opinion that no one should be allowed to possess more than one million dollars’ worth of property. Alongside of it is another slip, on which another writer expresses the opinion that the limit should be five millions. I do not know what the comparative wealth of the two writers is, but it is interesting to notice that there is a wide margin between their ideas of how rich they would allow their fellow-citizens to become, and of the point at which they (“the State,” of course) would step in to rob a man of his earnings.

    This was written in the late 1800’s and is relative today, I think. If you haven’t, it is easy to find online and read, it’s just a short article.

    • #9
  10. Misthiocracy ingeniously Member
    Misthiocracy ingeniously
    @Misthiocracy

    “There’s nothing in this world that anybody wants or needs to do that you can’t do with, let’s say, $10 – 15 million.”

    According to Wikipedia, Jeff Bezos funds Blue Origin by selling off about $1 billion in Amazon stock per year.  He wouldn’t be able to do that if he only had $10-to-15 million.

    • #10
  11. Randy Weivoda Moderator
    Randy Weivoda
    @RandyWeivoda

    RushBabe49 (View Comment):

    The so-called “inequality research” is the biggest bunch of BS ever perpetrated on the academic/economic community. It is the Politics of Envy writ large, and no one operates the way those “researchers” propose. If they had a brain in their heads, they would know that inequality is good, and necessary for human society. How else are people to strive for anything, if they can’t increase their wealth? Someone has to be wealthier than you, for you to want to be that wealthy, and work toward greater wealth.

    Exactly.  And I don’t understand why some people think that if one person increases their wealth, that it follows that someone else (or a bunch of someone elses) became poorer.

    • #11
  12. Stina Member
    Stina
    @CM

    David Foster (View Comment):

    James Pethokoukis: As a policy adviser to Rep. Alexandria Ocasio–Cortez has said, “If you have $5 million, you can live off the interest of that and be a one-percenter.

    What does this policy adviser think the interest rate is?

    Twice as high ast it actually is. I’m at 1.59% and that was one of the highest we could find.

    • #12
  13. Stina Member
    Stina
    @CM

    Randy Weivoda (View Comment):

    RushBabe49 (View Comment):

    The so-called “inequality research” is the biggest bunch of BS ever perpetrated on the academic/economic community. It is the Politics of Envy writ large, and no one operates the way those “researchers” propose. If they had a brain in their heads, they would know that inequality is good, and necessary for human society. How else are people to strive for anything, if they can’t increase their wealth? Someone has to be wealthier than you, for you to want to be that wealthy, and work toward greater wealth.

    Exactly. And I don’t understand why some people think that if one person increases their wealth, that it follows that someone else (or a bunch of someone elses) became poorer.

    It’s what they do when they have money that’s a big problem. How many of these wealthy business owners have lobbied for government to erect regulatory barriers to entry?

    • #13
  14. Full Size Tabby Member
    Full Size Tabby
    @FullSizeTabby

    It greatly annoys me that the high tax advocates talk only of the effect on the people who already have money. Sure the guy with $10 million might not be too uncomfortable if you took half his wealth. But the real risk is that the people who don’t now have wealth but might by taking risks and working really, really hard, earn money in the future. Will a prospective entrepreneur take the same risks if his potential $10 million reward will instead be only $5 million? 

    I have the same complaint about discussions of regulations. Regulation advocates point to surveys showing that current businesses will not close if one more regulation is imposed. But what about the businesses that are not yet in existence for which the cumulative effect of ALL the existing regulations PLUS the new regulation is a barrier to entry into the market. 

    • #14
  15. Randy Weivoda Moderator
    Randy Weivoda
    @RandyWeivoda

    Stina (View Comment):

    Randy Weivoda (View Comment):

    RushBabe49 (View Comment):

    The so-called “inequality research” is the biggest bunch of BS ever perpetrated on the academic/economic community. It is the Politics of Envy writ large, and no one operates the way those “researchers” propose. If they had a brain in their heads, they would know that inequality is good, and necessary for human society. How else are people to strive for anything, if they can’t increase their wealth? Someone has to be wealthier than you, for you to want to be that wealthy, and work toward greater wealth.

    Exactly. And I don’t understand why some people think that if one person increases their wealth, that it follows that someone else (or a bunch of someone elses) became poorer.

    It’s what they do when they have money that’s a big problem. How many of these wealthy business owners have lobbied for government to erect regulatory barriers to entry?

    Well the infamous Koch brothers have largely lobbied for more freedom and less regulation.  Even poor people can join organizations that lobby government.  Some rich people may use their wealth for purposes I disagree with, but I still don’t want confiscatory taxes on them.  When you go after the rich hard enough, you get Venezuela, and rich and poor alike suffer.

    • #15
  16. Gazpacho Grande' Coolidge
    Gazpacho Grande'
    @ChrisCampion

    Hang On (View Comment):

    Who cares if there were no Tesla or Spacex?

    Maybe the people who buy Teslas, and work at Tesla.  The same for SpaceX (or will be “buyers”, for a ride into orbit).

    • #16
  17. Gazpacho Grande' Coolidge
    Gazpacho Grande'
    @ChrisCampion

    The thing about capital is that it doesn’t just sit there – it *does* something.  Capital gets invested, in thousands of ways, where it can be productively (most of the time, sometimes things fail) used in existing businesses, start-ups, etc.  The whole notion of the economy rests upon the assumption that there’s some kind of return on investment.  Else no one would risk capital in any way, and money would be devalued over time as inflation eats it.

    The dolts in Congress invest in retirement funds.  Where do they think those dollars go?  Why would they advocate for a reduction in their own return on investment, unless they’re already either a) so secure financially that they don’t care (Hi, Mrs. Pelosi!), or b) they are, again, dolts, more interested in scoring political points than doing something that makes sense both economically and from a public policy perspective.

    Setting limits on income is one of many first steps.  The next would be to confiscate the means of production, because that’s where the capital gets invested into.  Seize Tesla.  Re-tool their manufacturing line.  Make Ladas, by hand, to keep citizen busy and support Supreme Leaders.

    Everyone wins, comrade.

    See the source image

    • #17
  18. Misthiocracy ingeniously Member
    Misthiocracy ingeniously
    @Misthiocracy

    Lada makes a pretty cool 4×4.  Used to see a few of ’em around town when there was a Lada dealership here.

    It used to feature an emergency hand-crank, in case your battery died out in the wilds of the Russian taiga.  I dunno if the current version still includes that feature, now that Lada is owned by Renault.

    https://www.lada.ru/en/cars/4×4/bronto/gallery.html

    • #18
  19. Stina Member
    Stina
    @CM

    Randy Weivoda (View Comment):
    Some rich people may use their wealth for purposes I disagree with, but I still don’t want confiscatory taxes on them

    That’s not what your original statement was about.

    I pointed out it wasn’t them getting richer that led to others being poorer. It’s how they used that wealth that made others poorer (or contributed to it).

    And in so far as immigration depresses wages, the koch brothers contributed as well.

    And yes, poor people can lobby, too. But their access is much more limited. Money talks. That’s reality.

    No where have I said they should be taxed more.

    • #19
  20. Randy Weivoda Moderator
    Randy Weivoda
    @RandyWeivoda

    Stina (View Comment):

    Randy Weivoda (View Comment):
    Some rich people may use their wealth for purposes I disagree with, but I still don’t want confiscatory taxes on them

    That’s not what your original statement was about.

    I pointed out it wasn’t them getting richer that led to others being poorer. It’s how they used that wealth that made others poorer (or contributed to it).

    And in so far as immigration depresses wages, the koch brothers contributed as well.

    And yes, poor people can lobby, too. But their access is much more limited. Money talks. That’s reality.

    No where have I said they should be taxed more.

    The original post does talk about people who think that the rich should be taxed more, so I don’t get where I’ve gone astray from the point in this thread.  I apologize if my phrasing made it seem like I was suggesting that you were endorsing a wealth tax.

    • #20
  21. MISTER BITCOIN Inactive
    MISTER BITCOIN
    @MISTERBITCOIN

    THERE are only 700 billionaires in USA

    700 people cannot pay for every program that bernie and the fake cherokee wants

     

    • #21
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