Why a Wealth Tax is a Bad Idea

Here’s How Trump Should Tax The Rich

… Anyone who has a net worth over $5m (or $20m) has to pay 1-2% of that amount each year. It would be like the estate tax, except you paid it while living. Warren Buffett complains he does not pay enough in taxes. This would quiet his moaning; it would also solve some of our fiscal problems.

The press for such a tax would be too rich to ignore and neuter outrage, if any, from the Left’s normal priest class. It’s repeatedly pointed out how thirty, a dozen, or even just eight men, hold as much wealth as the bottom half of humanity. Bill Gates would be forced to come up with a billion. The Waltons would pay $1.6B. And the Koch brothers would pay $1b.

If a 2% wealth tax was applied to everyone who had a net worth over 5 million, the revenues would be roughly $700 billion a year. That’s just about the right amount to get the budget to where it starts to make sense. This tax increase would not come out of current income, and therefore the economy would not be whacked.

On the surface, a ‘wealth tax’ seems like a good idea to raise revenue: the richest 85 people in the world control more wealth than the bottom 50%, and the top 1% of Americans control 34% of US wealth:

But this invokes a ‘fairness’ argument…is it morally justified for the government to take what isn’t theirs (even if such wealth doesn’t seem to be being put to good use). Taxation may be tantamount to saying that the US government is better at creating/managing wealth than the individuals who themselves created it. Maybe the answer is ‘yes’, to some degree. Taxes are used to pay for ‘public goods’ that keep the entire infrastructure, that even the wealthy depend on, intact – things like military, police, roads, national security, courts, etc. (although libertarian purists argue that these services could and should be outsourced to the private sector). Bill Gates alone could not fund a modern army, so taxes are a way to pool together all this wealth to pay for services that provide some sort of ‘net gain’ for society that any one individual could not possibly create for his or her own self. There is also a social welfare component. The short-term personal inconvenience and imposition of taxation to pay for healthcare and education, in the long run, perhaps is better than the alternative.

Perhaps some taxes, if the money is spent in an efficacious manner, can be a net-positive for society. But the biggest problem is that too many taxpayer dollars are being wasted on low-ROI programs. Gifted education has a high ROI because individuals in the top 5% of IQ are most likely to create economic value to society through job creation and innovation, but too much money is wasted on special education on children who, economically speaking, will amount to little in life. We need more spending for technology and fostering america’s best and brightest, not wasting it on its dullest. The data shows income and wealth is positively correlated with IQ, and that welfare dependency and long-term unemployment is negatively correlated with IQ. Too much money is wasted on public healthcare in treating people with terminal diseases, poor lifestyle choices, and for end-of-life care, when such money could be used for individuals with better prognostic markers. Instead of welfare spending to no end, how about eugenics–to at least in the long-run put a dent in America’s welfare problem, because low-IQ parents, who are often on welfare, tend to have low-IQ children who then later also go on welfare. How about instead of federal student loans for all majors and students, restricting it to high-IQ students and or STEM majors, who are the most likely to not only complete their degree but also pay back the loan. Spending trillions of dollars to spread democracy to the Middle East has been a failure.

The top 1% of income earners already pay their fair share:

The top 1% of earners pay 50% of all income tax. The bottom 20% of earners actually have a negative effective tax rate after taking into account welfare spending.

Part of the allure of the wealth tax is the perception that the wealth of the top 1% isn’t actually ‘doing anything’–in that it’s not being used to buy stuff, but rather it just sits idly in stock, cash, or real estate, while everyone else in the bottom 99% spend their income on food, housing, and other stuff that goes directly into the economy.

Although wealth at the top 1% may seem inactive relative to the bottom 99%, the wealthiest of Americans account for most of private venture capital funding. From the post Why Do The Rich Need So Much Money?:

…capitalism is expensive and the failure rate is high. Venture capital is mostly funded by wealthy, exmaples being the Space-x and Blue Origin rocket programs, both very costly and funded by billionaires Musk and Jeff Bezos, respectively. If taxes were much higher, such programs may not exist.

Investment comes from savings. If the wealthy cannot save, they cannot invest.

Long-term capital gains are taxed at a lower rate than income, but that is to compensate investors for the greater risks that they take, compared to income earners:

What the liberal ignores is that investment involves risk, potentially 100% of invested capital or more, unlike a paycheck. Or in mathematical terms, the cumulative equity curve of a paycheck is monotonically increasing whereas investments have ups and downs.

A major problem with a wealth tax it may create a major crisis of confidence, possibly spiraling into a recession or even depression. Investors may liquidate assets into cash (and then withdraw this cash from the bank) to evade the tax, depressing the overall economy, possibly creating a bank run and reducing total tax revenues, thus more than negating any additional revenues from the tax. When the Greece government in 2013 imposed a 10% wealth tax on all bank deposits, it triggered such a massive run on the banks that they never attempted that again, because it made everything worse.

Another problem with a wealth tax is that it’s essentially socialism, although very gradual. The wealthiest of Americans typically do not hold their wealth in cash but rather in assets such as stocks and real estate. If the government were to tax this wealth, they would own the stock and fractional pieces of the real estate. The government would own shares of Microsoft, Berkshire Hathaway, Google, Facebook, etc., and over many years (at 2% a year tax), this could add up to a substantial amount of ownership if the 2% wealth tax exceeds the ability of the company to grow its own assets. The government could use this ownership to influence how such companies are run, through proxy voting.

What need is policy that grows the tax base (makes the pie larger), not tries to make the pie more equal. And second, we need policy that makes better use of existing tax dollars, instead of the wasteful low-ROI spending we have now.