Why a Wealth Tax is Warranted!

The billionaire Bill Gates recently suggested that a big tax increase, the one implied by adding a wealth tax, would hurt economic growth. “I do think if you tax too much you do risk the capital formation, innovation, U.S. as the desirable place to do innovative companies — I do think you risk that.”

Bill Gates may have his facts backward. When he founded Microsoft in 1975, the top marginal tax rate on personal income was 70 percent and the estate tax was even more formidable. That didn’t stop him for starting Microsoft.

I would argue that the growing level of wealth concentration is making all of us poorer! The more money in the hands of the few, the slower our rate of economic growth and the slower our rate of job creation.

My economic argument rests on the marginal propensity to consume that is taught in all economics classes. If you give a poor person an extra $100, he is likely to spend it all, either paying off pressing debt or buying new goods. If you give a rich person an extra $100, he is likely to deposit it in his or her bank account. Much depends on whether the bank lends out the $100 or it stays in the rich man’s account. One thing is sure: the extra $100 won’t do anything to change the rich man’s lifestyle. But if the poor man got $100, it will help him meet some pressing needs.

So the argument is that shifting some of the rich man’s money into the hands of poorer families will result in higher consumer spending. Higher consumer spending will keep our factories manufacturing more goods and support people’s jobs. Actually this should be welcomed by the capitalist owners of factories, wholesale and retail companies. It will help capital owners become richer.

One counterargument might be that rich people might have spent their money on consumer goods or on investment goods. If they spent their money on consumer goods, these would be high priced goods (expensive apartments, automobiles, high fashion goods, expensive meals and travel, etc.). But the rich person had enough money to buy these goods even if the wealth tax took away a small amount of his money. Or the rich person might have spent the money to expand his factory or open more stores. But what good will this do if average consumers are left without enough income to spend in these new stores?

My argument remains that the great concentration of wealth in a few hands is preventing our economy from growing faster and raising the standard of living of most Americans

What is a Wealth Tax?

The U.S. never had a wealth tax. The U.S. has a personal income tax, a corporate income tax, sales taxes, property taxes, capital gains taxes, and dozens of other taxes. Actually a property tax is like a wealth tax except that it only taxes one type of wealth, property.

A wealth tax would call for estimating the total wealth of a person or family. It would include the value of their property, stocks and bonds, fixed assets (homes, cars and appliances) and anything else having market value. The government would pass a bill requiring an annual payment of some percentage of the person’s or family’s wealth.

Senator Elizabeth Warren proposed a detailed wealth tax plan. She called for households to pay an annual 2% tax on all assets — net worth — above $50 million, and a 3% tax on every dollar of net worth above $1 billion. She recently added possibly raising the billionaire wealth tax rate to 6 percent instead of 3 percent to help pay for “Medicare for all” without needed to tax the middle class.

The extremeness of income inequality is made more vivid by quoting the research done by Oxfam in the U.K. Oxfam, founded in 1942, is a confederation of 19 independent charitable organizations focusing on the alleviation of global poverty. Oxfam estimates that in the U.S. today, the richest three Americans hold more wealth than the bottom 50% of the country. They added that in 2018, the world’s richest 2,200 billionaires saw a 12% increase in wealth, while the world’s poorest half saw an 11% drop in wealth. The American economist Joseph Stiglitz stated that “40 percent of the world’s wealth…controlled by 1 percent of the people.”

According to the U.S. Federal Reserve, 40 percent of U.S. adults don’t have enough cash to meet a $400 emergency expense. And a 2016 report by the U.S. Government Accountability Office (GAO) estimated that 29% of older Americans had neither a pension nor savings upon retiring.

Contrast this with the life of affluent Americans who occupy the upper middle class. These families usually own a large home, two cars, and fashionable furnishings. Their kids go to private schools and on to college. The parents belong to a country club and are able to take one or more expensive vacations a year. They normally have enough earnings, savings and insurance to be free of worry about sudden major costs.

The rich and the superrich earn so much that they never have to worry about money. They can afford hotel rooms costing $1,000 or more a night and buy homes costing $5 million or more.

President Theodore Roosevelt repeatedly advocated tax policies that would create more equality. He said: “It is important to grapple with the problems connected with the amassing of enormous fortunes swollen beyond all healthy limits. Years later, President Franklin Delano Roosevelt said of his New Deal in the 1930s that he pledged “to save capitalism from itself.”

What are the Main Arguments of the Superrich Against a Wealth Tax?

The superrich are likely to use at least five arguments against a wealth tax.

1. I earned the money honestly and fairly.

A large number of billionaires earned their money honestly and fairly. Those who created a new technology — Thomas Edison, George Eastman, Steve Jobs, Mark Zuckerberg — created new offerings that contributed to our lives and life styles. They took advantage of the legal patent system to create a long lasting monopoly. They ran a rich cash generating engine that didn’t have to face competition for twenty years.

Another large number of billionaires gained huge incomes because of their adeptness at financial and legal maneuvers. They were able to ward off or emasculate would-be competitors for a long period of time. Many of the Robber Barons of the 19th century built huge fortunes by deft moves and strong allies.

Another large number of billionaires gained huge incomes from more shoddy practices such as not paying their bills, harassing suppliers, making poor products, or engaging in fraudulent activities (consider Bernie Madoff or other large scale crooks).

We cannot determine which billionaires achieved their wealth through honest and fair methods and the others. Because this can’t easily be done, all of them will need to pay the wealth tax if passed.

2. A wealth tax will discourage the wealthy from investing in risky ventures and lead to a critical shortage of investment and depress our economic growth.

Long ago, capital was scarce and demanded a higher return on investment. Today capital is abundant and fully available at low interest rates. European banks hold so much money that depositors have to pay banks to hold their money. In America, many large corporations use their money not for investment but to buy back their stock or pay higher bonuses to their management.

3. The superrich have excellent lawyers who stand ready to help the rich defer, avoid or minimize the wealth tax.

Many wealthy families put their money into income earning securities — stocks, bonds, real estate — which they don’t have to sell and therefore they pay no taxes until sales occur. These securities keep earning money that eventually passes on to family members as gifts. Many other families establish non-taxable foundations to give money to good causes. Consultants also help families put money into foreign accounts in a host of tax shelters.

4. A tax on wealth would depress philanthropy that supports many museums, universities, hospitals and other valued institutions and causes.

The rich argue that they give great sums to charitable causes and they would cut down their gifts as a result of a wealth tax. This would damage many fine institutions and all of us will lose.

Interestingly, the opposite result might take place. Wealthy families might prefer to increase their donations rather than let the government decide where their wealth should go.

5. A wealth tax is unjust and unconstitutional.

The U.S. has never had a wealth tax and its constitutionality would be challenged. The wealthy would argue that a wealth tax invades property rights and amounts to arbitrary confiscation.

What Do Average Citizens Think of Taxing the Wealthy?

Citizens carry different attitudes toward the rightness or wrongness of extremely large differences in income and wealth. Here are some opinions heard on the street.

1. “I am only concerned with whether I have equal opportunity and not with income differences.”

2. “There will always be extreme differences in income. It is the survival of the fittest.”

3. “High incomes are mostly the result of differences in ability that lead to differences in income.”

4. “High incomes come from having the right parents. If you are born in a wealthy family, you will be brought up with more advantages and go to the right schools and get excellent jobs, partly through your parent’s connections.”

5. “The super-rich have rigged the system to get us complacent through feeding us the ‘candy’ of television, cell phones, philanthropy and other distractions so that we don’t notice their thievery.”

6. “From a social justice point of view, I think that the rich should be taxed proportionately higher than the average income earner.”

I can imagine only one system of income distribution that would be worse than today’s excessive wealth. The worst would be if everyone was limited to getting the exact same income, regardless of age, family size, ability, effort and other factors. There would be no incentive to work or innovate.

The system that we have today of extreme income and wealth disparity has existed through most of history. Territories were run by tribal leaders or a king or queen who along with all the court and courtiers would amass great wealth. There was hardly a middle class. There was a huge peasant or working class, and most of the laborers were serfs or slaves living on a bare subsistence level.

Why Does Wealth Concentration Remain Such a Problem?

Why is the very high concentration of wealth a problem? Essentially, wealth concentration undermines the operation of a democratic society. In a democratic society, each qualified person has one vote. Today, wealthy families have a disproportionate influence on the voting outcome and on public policy. Recognize further that most of today’s wealthiest people are wealthy by inheritance, not by contribution. The three daughters of the Walmart family each inherited $45 billion by the accident of birth. The super-wealthy are able to select and finance conservative candidates for each election campaign. The Huffington Post reported that billionaires Charles and David Koch pledged to give $60 million to unseat Obama.[1]

The Supreme Court decided in the Citizen’s United case that a corporation could be called a “person” who under “free speech” could create or give substantial sums of money to PACS and SUPERPACs to spread conservative views. Wealthy families and corporations, by giving heavy donations to conservative candidates, have a much greater voice in influencing who become our legislators and how they will vote. Working class families lack personal influence and only can rely on their weakening unions to exercise some counter influence. The bottom line is that great extremes of income and wealth can diminish or destroy the power of the people to choose and vote for the best candidates.

The Economist Thomas Piketty Favors a Wealth Tax

The French economist Thomas Piketty holds that wealth inequality keeps growing because in this period “the rate of return on capital…is higher than the economy’s growth rate.”[2] He sees income from capital continuing to exceed income from wages and salaries as a worldwide phenomena. His preferred solution: “a global tax on wealth combined with higher rates of tax on the largest incomes.”

Wealth would include real assets — land, houses, natural resources, office buildings, factories, machines, software, patents, stocks and bonds. Households would have to declare their net worth to the tax authorities and pay a levy of one percent for households with a net worth of between one and five million dollars, and two percent for those worth more than five million. Piketty adds that even a steeper progressive tax of 5–10 percent on wealth above one billion euros would help break up such fortunes. In the U.S., this would mean that the 16,000 people (the top hundredth of 1 percent) who have a combined net worth of $6 trillion would pay substantial taxes, and the money would presumably be used to improve the education and health of the U.S. population.

Piketty recognizes problems with his proposal. First, the wealthy would scream that this would reduce incentives and innovation. Piketty doesn’t believe that innovation will be hurt. Second, this proposal would never be proposed, nor passed because politicians are dependent on the wealthy for being reelected. Third, the wealthy would transfer their wealth to other countries where this wealth tax did not exist. They wouldn’t transfer it to Spain which has a wealth tax of 2.5 percent of assets. Piketty would need to advocate that all countries pass such a wealth tax, which he admits is clearly a utopian idea. Piketty is realistic but offers his proposal as a standard against which to judge other proposals for curbing the growth of wealth inequity.

The World Bank economist Branko Milanovic said of Piketty’s book: “We are in the presence of one of the watershed books in economic thinking.” Paul Krugman wrote that Piketty’s book “will be the most important economics book of the year — and maybe of the decade.”[3] Paul Krugman thinks that Piketty’s book has the potential of creating a monumental change in public attitudes toward growing income inequality.[4] The publicity that the book is receiving is making people aware that all great wealth is not the result of meritocracy where great wealth is earned and deserved. Much of the income of the wealthy is not coming to them on the claim that they are “job creators.” Much of their income is coming from the assets they own, “not from their enterprise but from their inheritance.”

Piketty’s book is now worrying the rich because they have not been able to tear down its premises. They rely on name-calling by calling it Marxist or collectivist or Stalinistic. The rich are on the run politically and will use their money to confuse the public as much as possible regarding the real issues. One unsolved mystery is how can it be that so many poor or working class people or even many middle class people identify their interests with the political party whose whole basis is to defend the interests of the superrich.

The real challenge is to convince the superrich that paying higher taxes would benefit them as well as the general public. Arguments can be used that roads and infrastructure will be improved, workers will have more money to spend on the businesses owned by the rich, and the public will think that the tax system is fairer and be willing to comply more readily. If the government can demonstrate that its operations are efficient and that their tax money is going to the right causes, people will be more willing to pay their fair share of taxes. In the end, is it better to move toward a budget calling for preserving tax loopholes and cutting taxes and cutting investments in education, health, and infrastructure or to develop a system that raises more money through a fair and efficient tax system and use the money to improve the lives of people.

Conclusion

Clearly a whole set of solutions exist to reduce the sharp differences between the wealth of the superrich and the other groups, solutions that are not likely to damage incentives or productivity. The problem is not one of sound economics. It is one of the ways politics interferes with economics and allows the rich and their publicists to confuse average citizens as to what lies in their best interests and in the country’s long term interest.

The question remains: “Is capitalism intrinsically destined to produce little for the poor, and extreme incomes and wealth for the few. This seems to be the tendency of unregulated free markets. It leads to the concern that capitalism could contain the seeds of its own destruction.

Why? Capitalism depends on consumers having enough money to buy all the goods and services that the capitalist economic machine produces. Without rising real income in the pockets of the majority of the citizens, the result is overstocks of goods, slowdowns in investment and production, and a rising unemployment rate. The amount of joblessness can reach a point of inspiring an uprising and attack on not only the wealthy but capitalism itself. Ultimately capitalism will be judged on the degree to which it improves the lives of all its citizens. Capitalism has to save itself from Revolution by a fairer tax regime on income and wealth.

[1] David Gilson, “How Much Have the Kochs Spent on the 2012 Election,” Mother Jones, November 5, 2012.

[2] See John Cassidy, “Forces of Divergence,” The New Yorker, March 31, 2014, pp. 69–73.

[3] Peter Coy, “An Immodest Proposal,” Bloomberg Business Week, April 12, 2014, pp10–11.

[4] Paul Krugman, “The Piketty Panic,” New York Times, April 24, 2014.