Why Wealth Taxes Are Counterproductive
Senator Elizabeth Warren, a Democratic presidential candidate, is calling for an annual 2% wealth tax on any individual’s net worth above $50 million, based on the premise that great income and wealth inequality (actually due to the development of enormous new markets globally and technological advances, not to something nefarious) is not only immoral, but a hindrance to economic growth and to solving societal problems. The same argument is made by Representative Alexandria Ocasio-Cortez with her call for a marginal income tax rate of 70% on incomes above $10 million, and by Senator Bernie Sanders with his call to reduce the estate tax exemption to $3.5 million. Arguably that premise is seriously mistaken, but the debate should take place in order to remove misconceptions. (That debate would be preempted if there were a general realization that wealth taxes are clearly unconstitutional, which no one seems to realize for the moment. In any case, what should be called for by Democrats and Republicans alike is the elimination of tax shelters, both for tax fairness and for optimal economic growth. In fact, tax shelters serve no purpose except to allow the very wealthy to avoid enormous amounts of income taxes. Furthermore, what is perhaps even worse, they actually retard productive investments and economic growth by causing a significant misallocation of capital.)
The justification/rationale for wealth taxes, for higher marginal tax rates on high incomes, and for reducing the estate tax exemption, is misguided. It is based mainly on a typical invidious, socialistic sentiment, since it is simply not true that increasing taxes on the very wealthy would serve to increase economic growth and help solve social problems, as a dispassionate analysis would confirm. (A brief digression: Reference to Denmark and Sweden, countries with high tax rates and lower rates of poverty, is misleading. The real cause of poverty in the U.S. is a low level of education, and that is not due to our lower tax rates, but to a deficient political commitment to providing a truly excellent public school education for every single youth. Furthermore, our lower tax rates are directly responsible for the vibrancy of our economy and our technological innovations. As for our health care coverage and cost inadequacies, the problem would be solved by removing geographical limitations imposed on medical insurance companies, which reduce competition, and by ensuring total pricing transparency by health care providers, which would enhance competition.)
What do very wealthy people do with their money? They spend it on personal consumption, such as on homes, furniture, boats, airplanes, autos, art, jewelry, clothes, travel, hotels, restaurants, opera, and theater. All consumption leads to jobs and sales taxes. So the very wealthy contribute immensely to society through their consumption spending.
The very wealthy spend lots of money on personal consumption, but that is a fraction of their income. There’s only so much caviar one person can eat. The rest of their income, by far the largest part, is invested. It is invested in stocks, bonds, real estate, ongoing businesses, and in venture capital. Investment is the biggest and most important of all contributions to society. No society or nation can be prosperous economically and make progress without lots of investment. Quite obviously, only wealthy people have lots of money left over after personal consumption, and that money is invested. So, the very wealthy (those who make their money legally!) are essential for the success of all societies and nations. The more, the better!
The very wealthy, taken as a group, have particular talents, such as making good investments, taking intelligent business risks, and knowing how to successfully run companies. Eliminating or diminishing the wealthy is a perfect recipe for having an underperforming society or nation. The experience of communism is absolute proof. Government bureaucrats as a group are very mediocre entrepreneurs, and a society which entrusts them with its business decisions is bound to fail.
So, even just a small 2% wealth tax will have a negative effect on economic growth. And no matter how the government spends it, since governments are invariably inefficient and incompetent operators, that 2% will be wasted. There will be no real added benefit to society. As mentioned above, for real tax fairness what should be eliminated are tax shelters: they serve no good purpose except to avoid income taxes, and they actually retard real economic growth by misallocating capital away from productive investments.
The big problems of society, such as poverty, violence, addiction, mental illness, and mediocre earnings of the lower middle class, cannot be solved by soaking the rich. They can only be solved by having every single youth truly well educated. The current income tax rates are sufficient for that goal. That goal requires not only having excellent public school teachers and small classes, but also, of crucial importance, an enlightened curriculum for the complex, highly competitive global economy, and firm class discipline and lots of homework. For those students having academic difficulty, there is an absolute need for individual tutors. In some cases, summer school is required. In particular, the high school curriculum should include economics and finance, so that all citizens understand how the economy works, how to invest their own savings, and how to identify and vote for the right economic policies. The economics/finance course should highlight all the conventional economic theories that have been flatly contradicted by statistical history, proof that they are flawed. The high school curriculum should also include four years of psychology, along with “group therapy” classes and “good parenting” classes, since that would go a long way towards having a well-adjusted society. Also very important is a course on the United Nations Universal Declaration of Human Rights along with the history of human rights violations; a four-year course on the history of the 20th Century; a special civics course on all the mistakes in economic, social, and foreign policy made over the past 100 years, and what would have been the correct policies. Also a course in ethics, logic and critical thinking. Last but not least, history of art, architecture, and design and the history of music are essential courses for well-rounded, creative, and happy citizens. In order for true equality of opportunity, we also need universal day care and “Head Start”, and all public schools to offer well organized after-school activities in the arts and sports, on weekdays, weekends, during vacations and the entire summer break.
Given the crucial importance of having an enlightened curriculum for all our youth, there should be a demanding, prestigious national high school graduation test covering all the courses essential for having a very well educated and well-adjusted citizenry. At a minimum, all schools will have to prepare their students to pass such a test. Since competition makes for best quality and most cost-effectiveness, public schools must be run as private schools. The successful ones will expand, the unsuccessful ones will shrink.
Providing a truly excellent and enlightened education for every single youth must be the nation’s priority. It is an investment which will pay enormous dividends. In one generation, there will be no more children growing up in poverty and not getting very well educated. There will hardly be any violence. There will be an enormous increase in social and economic prosperity. Our foreign and economic policies will improve dramatically. Income tax rates will plummet. Estate taxes will be abolished, whether or not they are found to be unconstitutional. And no one will be advocating wealth taxes or high marginal income tax rates. This is not an unreachable utopian vision. Americans must simply learn to select truly qualified leaders.
© Edward Sonnino 2019
February 6, 2019
