A Sure Way To Waste Everyone’s Money.
One of the three most likely Democratic nominees for the upcoming 2020 US Presidential Election, Elizabeth Warren, has garnered significant flack in the weeks previous.
She has been levelling her significant platform against the wealthy of the United States, more specifically levelling her platform against exclusively 1% (of which she is certainly a member) via a proposed policy called the Wealth Tax.
Blaming the rich for the woes of the poor has been a common sentiment felt in politics throughout history, and has not always been without cause.
“Let them eat cake!” Infamously gargled Marie Antoinette when her monarchy woefully failed to redistribute the significant French wealth to a starving population. Or more recently in Chile, who, with a 65% gap of income inequality wider than the OECD average, are legitimately pricing out the majority of their population in an overly privatised state with no talk or policy of income redistribution.
There are certainly cases now and in the past of nations whose poor have had legitimate cause against the rich. But very rarely now, and certainly not in America.
The Wealth Tax Has No Redeeming Qualities
The brief paragraphs following are an outline of the consequences of this policy. And as usual, similarly to the minimum wage, the policy detriments most the very people it is supposed to serve.
The distinction between wealth and income.
As you produce and work and earn an income you are benefiting from the public infrastructure that supports your ability to earn that income.
For this privilege, the government of your nation will take between 20% and 60% as payment, depending on where you live.
With your remaining income, you may spend as you see fit. Most people will buy a car, a house, some furniture, a boat, investments and so forth. These assets are now a part of your wealth since they hold resale value convertible to become cash in your pocket.
Since you have already (over)paid for the privilege to work in your country and have also already paid for the environment within which you live, you might start scratching your head should that same government now turn around cup in hand again.
The problem of compliance
Warren is suggesting an annual wealth tax of 2% for income earners of $50,000,000 or more in the United States. You must assume that if she was elected and this policy was enacted then year on year that threshold would lower and lower.
This would mean year on year an IRS auditor needs to value the (numerous) assets of our multi-millionaires in question. Not always an objective measure. The value of certain things is very rarely unanimous. You can get a ballpark figure on my houses, cars, and boats. You can get an exact figure on my public investments. You can get an oppositely arbitrary figure on my private investments and you can be completely wrong about my art collection. Rare artworks are routinely selling for twice or half their supposed value. After all, I have $50,000,000! I own a lot of stuff.
So our IRS auditor needs to year on year inefficiently and invasively sweep through my wealth and then determine what 2% of that is. Which, if you’ve been following, can be a figure drastically untrue and inaccurate.
The detrimental effects on the market
Despite the moral dubiousness of taxing wealth and the woeful inefficiency of collecting it, the real cost and problem with the wealth tax is how it will affect the economy.
Incentives drive behaviour
There are two parts to this: Will the wealthy leave? and what else will they do with their money?
Many of the countries most wealthy people have already moved their lives to Puerto Rico and other tax havens of the like. And that is to simply avoid the income tax. The effect of a wealth tax would see people move in droves. What the wealthiest do with their money is very rarely only ever going to gratify themselves and those immediately around them. This issue is not about Mark Cuban buying his 6th or 7th house, or whether Donald Trump eats $1000 steaks. If it were as simple as that then a wealth tax would make more sense, rather than indulge in outrageous excess, perhaps the money could be better spent elsewhere. But it’s not about that.
What happens if I hold $1,000,000 worth of shares in Tesla and all of a sudden my wealth tax is due? What if I don’t have the liquidity (cash) to pay how much I owe?
I need to liquidate (sell) one of my assets in order for me to have the cash to pay the tax. I could sell a house, a car, a painting, sure – but those are arduous tasks and much harder than me selling my position in Tesla. I don’t want to sell my position in Tesla, but I owe someone money and have a deadline to pay, therefore I make the best decision I can with the options presented to me. So I sell $500,000 worth of my Tesla stock. Artificially triggering a movement left (downwards) for Tesla in the publicly traded market. Now Tesla are affected because one sell off may lead to another and then again potentially to another, and all of a sudden Tesla is significantly down – but they didn’t do anything wrong, production is good, the products are working. They have been unfairly duped.
Now take this example to the extreme. Jeff Bezos is worth whatever billions of dollars. He has incredible wealth. The kind of wealth that can power nations. To tax him 2% would require him to liquidate millions of dollars worth of various investments, immediately destroying whatever else that money was working hard to achieve.
Jeff Bezos has never realised his billions of dollars because it is not his money. His ownership of Amazon means he is entitled to the money, but does not realise it. This is the key distinction. He will be taxed money he does not even have. Therefore, businesses need to change their practices, money is spent more frugally to invest and assets will be hidden at an unprecedented rate. All negative effects on the economy.
Final Nail In The Coffin
It is morally dubious to tax a persons wealth which was accumulated through already taxed income. Compliance is likely to cost more than the gains.
Incentives drive behaviours, and the wealth tax incentives less investment and less consumption which hurts the whole economy.
The French have had this policy for years, and a report from the OECD – Organisation for Economic Cooperation and Development said – “past attempts to tax wealth frequently failed to meet distributive goals and encountered significant administrative problems”
Richard Epstein suggests that a 1% drop GDP would eradicate tax revenue gained through the wealth tax. It is far beyond my means to calculate, but I would assume the negative incentives presented to the wealthy would cause a drop in investment and consumption significant enough to stifle America’s GDP beyond 1%.
It has failed before, and is likely to fail again. The wealth tax is stupid.