Certain arguments against increased taxes on wealth need to be dealt with seriously. For example, if we are told that imposing a new wealth tax (as Bernie Sanders and Elizabeth Warren have advocated) will have damaging effects on the economy that will hurt those who are not wealthy, we need to carefully evaluate the evidence to see whether or not this is likely to be true. The empirical issues here can be complicated. We might be told that a wealth tax will “damage economic growth,” but growth isn’t what matters. What matters is the resulting welfare of non-rich people. If we have an economy with only two people, one of whom is homeless and has only $10 and one of whom has $10 billion, and our proposed policy would give $10 more to the homeless person, then we might want to do it even if for some reason we thought it would wipe out $9 billion for the billionaire. Why? Because we’ve doubled the homeless person’s wealth even as we have had a negligible utility impact on the other person.
But questions about the macroeconomic effects of new wealth taxes on the non-wealthy are, as I say, empirically difficult and require the assistance of people trained in economics. These are the discussions worth having. Right now, though, I want to mention some of the discussions that aren’t worth having. One thing I’ve noticed in debates about wealth taxes is that many of the talking points by wealth tax opponents do not actually make the case that they will be bad for the economy. Instead, they make arguments that should have absolutely no effect on whether or not we support wealth taxes. And the fact that these bad arguments are such a strong part of the case against wealth taxes makes me think that critics of wealth taxes are probably grasping at straws.
Consider this article from the Wall Street Journal’s chief economics commentator, Greg Ip. It’s called “What Fewer Billionaires Could Mean For The Rest of Us,” which suggests that it will indeed be showing important implications of taxing billionaires for non-billionaires. But if you read the article, you’ll notice that it doesn’t actually say very much. The first few paragraphs are just dedicated to explaining that some Democrats support new wealth taxes, and the WSJ says that “it isn’t hard to see why,” since “the ultra-rich already control near-record shares of the country’s wealth and income yet have had their taxes slashed, directly and indirectly, by President Trump, driving the budget deficit sharply higher.” So far wealth taxes sound fine. Now we get to the critical part:
But should [billionaires] be taxed to the point that they are no longer billionaires? That’s a tougher case to make. In a 2016 book, economist Caroline Freund, now global director for trade at the World Bank, found that countries with a lot of billionaires per capita had higher incomes per capita. She also found a country’s share of the world’s billionaires, as compiled by Forbes, corresponded closely to its share of the world’s largest, most successful companies. While this doesn’t mean billionaires make an economy successful, it does show the two go hand in hand.
This is a fascinating paragraph. The evidence that Freund provides can be restated as “rich countries have the most rich people,” which is news to nobody. Then the Wall Street Journal does something sneaky: It wants us to know that it’s not so stupid as to think “correlation is causation” (“while this doesn’t mean”), but then it also wants us to conclude that correlation is causation (“the two go hand in hand”). The Wall Street Journal does not actually make the case that having billionaires is necessary in order to have prosperity. Instead, in the next paragraph, they move on and start talking about how inherited wealth is actually probably bad (“There is little economic benefit to the unlimited tax-free growth of inherited wealth.”)
What do we have here? We’ve been told that it’s a “tougher case to make” to say that billionaires should be taxed out of existence, but we’ve been offered no actual discussion of the value having billionaires provides. In fact, we’ve quietly been given two important admissions: (1) the right’s belief in unlimited-tax free inheritances does not make economic sense and (2) the Democrats’ opposition to the Trump tax cuts seems reasonable. This is the economic analyst for the conservative Wall Street Journal speaking, though it’s noteworthy that the free market fundamentalists on the paper’s op-ed page would probably howl in protest if they heard either of these points.
Next, the paper briefly cites some academic research showing that people tend to move to places with low taxes. (“the authors found that star scientists—the kind that power technology or biotech companies—tend to leave states with relatively higher personal or corporate income taxes.”) But okay, so what? I have no doubt that people try to avoid paying their taxes, and one of the crucial arguments that Emmanuel Saez and Gabriel Zucman make in their new book The Triumph of Injustice is that in order to avoid tax evasion we need to make sure the law doesn’t allow people and corporations to move their wealth to places that shield it from taxation. So this part of the article doesn’t make a case against wealth taxes either.
Now we’re coming to the end of the Wall Street Journal’s analysis. Here is the last bit:
Zuckerberg’s returns are exceptional. For more typical billionaires, Ms. Warren’s taxes could easily eat up most if not all his or her returns. Founders would have to steadily sell off their holdings to pay their taxes, shrinking their stake. “To say you can’t have that wealth means you can’t own your company,” Ms. Freund said. That’s a problem, she said: The founder is often a more successful and committed chief executive than an outsider. “They really, really care and need to have controlling interest to make decisions,” she said. Indeed, many billionaires use the wealth from one venture to start another: After selling Electronic Data Systems to General Motors, Ross Perot later used the proceeds to start Perot Systems. Mr. Bezos is selling Amazon shares to finance Blue Origin, his space company. This isn’t a reason not to tax billionaires; it’s a reason to be careful about how it’s done.
And that’s it! Article over. Did you see a case that wealth taxes would be devastating? Because I didn’t. In fact, the conclusion was that we just need to “be careful” about it. Go and read the article yourself and see if you can find any case made that wealth taxes are truly scary and terrible. And that’s the best that can be done by the Wall Street Journal’s chief economics commentator!
What about Freund’s point on “founders,” that they would not be able to single-handedly own giant companies? Well, first, Freund is wrong when she says that the founder of a company “needs” to have a controlling interest in order to “make decisions.” (I know this in part because I founded a company that I now don’t own, called Current Affairs.) Ownership and control are actually separate matters, and CEOs have pretty broad discretion to run companies even when they don’t actually own them. In fact, we know this is nonsense because Jeff Bezos only owns 12 percent of Amazon’s shares, and yet still exercises dictatorial control over it. Mark Zuckerberg owns less than one-third of Facebook. If the founder is really a “committed chief executive” and visionary, then presumably shareholders are going to want to give them broad discretion so that the company thrives.
Now, all of this is on the theory that Founder Genius Man is the secret behind companies’ success, which I don’t believe for a second. But even if we assume that it is critical that “innovators and entrepreneurs” have “incentives to innovate,” wealth taxes are probably almost irrelevant to that. Most people who invent anything worth inventing do it because they are passionate about it and not because they’re passionate about making money. In fact, when you read books by successful businessmen, one of the things they say over and over and over is that they didn’t set out to make money, they set out to make great products, and they just happen to have made piles of money through making great products. I say we take them at their word! Certainly, I think the best and most worthwhile things come from dedicated and ingenious people who are single-mindedly committed to their creative vision. In fact, it’s a good thing that this is true, because if it was necessary to financially reward the innovators in order to get them to innovate, capitalism would do a horrible job. As Peter Thiel has noted, for “extremely valuable innovations… the people who come up with them do not get rewarded,” because it’s businessmen and financiers rather then engineers and scientists that generally get all the benefit.
It’s funny to me that Freund says wealth taxes would mean “you cannot own your own company.” For one thing, it’s false: Sanders’ wealth tax starts to kick in at $32 million, so most people who own companies would see no change. But also: Individuals shouldn’t be able to own their own giant companies! These companies should be owned by their workers! A single person does not get to have their own space program, sorry. Ownership is power, and it’s too much power for one person to have to be able own a company where thousands of people work.
Okay, so the Wall Street Journal has no good arguments against Sanders-Warren wealth taxes and actually provides some evidence that they are good. But they’re actually offering better quality analysis than other places. Consider this article from right-wing economist Tyler Cowen in Bloomberg, called “Tax the Wealthy and Their Charities Will Suffer.” Cowen’s latest book is a literal love letter to Big Business, containing arguments of almost unbelievably poor quality. (At one point he says that Americans clearly enjoy work because the numbers of hours per week they work has increased over time.) His anti-wealth tax case is rather funny because it actually might convince you that wealth taxes are good. Cowen points out that if wealth is taxed, rich people will probably donate a lot more to charity, and give their private art collections to museums to avoid having it be taxed. Here, read his case:
The effects of pushing wealth out of the for-profit sector would be far-ranging. Wealthy donors might be more likely to pressure nonprofits for luxury consumption experiences, for example. Many nonprofits sponsor cruises to Alaska or the Caribbean for their donors, as a method of fundraising and also for building good will and networking. There’s nothing inherently wrong with that. But the pressures would rise for those cruise experiences to be much more luxurious — think freshly caught sushi, Rolling Stones concerts and private butlers. […]
[I]magine how art markets might be affected by a wealth tax. Rather than keeping their art collections private, many more billionaires would donate that art to museums and other nonprofits. This appears to be a good outcome. But it would exacerbate one of the art world’s worst problems, which is inflated appraisals for tax purposes. At any rate, America’s museums do not have the space or resources to display and look after all of these paintings and sculptures; it is already common for a museum to display no more than 5% or 10% of its collection. Essentially, a lot of art would be removed from circulation, stored in warehouses largely for tax reasons.
One thing you should always remember about libertarians is that they hate facts. If they touch a fact, they die. Facts are to libertarians like water was to the Wicked Witch. What libertarians like are stories. Here’s what I mean: If you say “We should raise the minimum wage to a living wage so that companies have to pay their workers enough to afford their rent,” a libertarian will not reply with facts, but with a story. They will say: Ah, but if you do that the company will simply lay off a bunch of workers and unemployment will rise. Note that this is not empirical evidence. It is a tale. A prophecy. Because the actual empirical evidence is that this does not in fact happen, that “the number of jobs cost by minimum wage laws is negligible” and “they raise wages without much downside.” Go near a libertarian with this and they will scream as they melt.
It’s the same with rent control. Rent control interferes with the market, thus it is bad, even though it isn’t. Cowen, being a libertarian, does not offer you evidence, he offers you stories. I have previously documented the way he did this about healthcare, telling you that if governments cover everybody’s medical expenses, cutting-edge treatments will disappear. He doesn’t offer empirical evidence, he offers you a scary bedtime story. (I subsequently received a letter from a doctor, who actually knew something about the economics of healthcare, explaining why these predictions were silly.) Much of right-wing economics is like this: It’s much more science fiction than social science, consisting of gloomy predictions that are at odds with the consensus of people who actually study the thing. (For example, when the University of Chicago polled the nation’s top economists about Republican predictions for the benefits of Trump’s tax plan, they almost unanimously thought these predictions were fantastical.)
So Cowen’s argument on art is: Yes, rich people will donate their art to museums, but (1) they’ll inflate the value of the art for tax purposes, and (2) museums are not large enough to display all of their collections. (1) just seems like an argument for cracking down on tax fraud, while (2) is interesting, considering that Cowen has also argued that charitable giving more generally is going to increase if we tax wealth. Presumably including donations to museums, which will build new wings to house more art! But wait, is the argument here really that if you tax wealth, museums will have more art than they know what to do with? And is he really saying that giving art to a museum, instead of having it in a rich person’s house, is “taking it out of circulation”? That seems like the opposite of what is happening. The public is actually going to be more likely to see more art.
Cowen’s article is bonkers. The headline is that “charities will suffer” with a wealth tax, but the subheadline is “nonprofit organizations would probably get more donations but become less efficient.” So the problem is that charities will have too much money. They might offer even more expensive canapes at their galas, or at least that’s what they do in the story. Okay, whatever, thank you for the warning. I am still prepared to tax billionaires through the nose!
Here, quickly, are a few more bad arguments against wealth taxes you hear a lot.
- New wealth taxes are “politically impossible.” I don’t think it’s worth spending much time responding to arguments about political impossibility, because nobody actually knows much one way or the other about the limits of the politically possible. One wouldn’t have thought it politically possible for Donald Trump to become President of the United States and ram through a bunch of tax giveaways to rich people, but here we are! So let’s just debate the merits of policy, settle on what’s good, and then dare to dream that we can do it.
- Wealth taxes are unconstitutional. Here is Larry Summers warning that wealth taxes are “likely to be declared” unconstitutional. I have recently dealt with this at length. I do not think we should be interested in whether policies are “constitutional” or not, because the United States does not yet have a democratically legitimate Constitution. The fight over constitutionality is a political fight that will depend on whether the left can win back control over the Supreme Court, but the argument that wealth taxes are “unconstitutional” just amounts to reminding us that conservatives currently control an undemocratic institution that can unilaterally veto our legislation, which we are aware of and need to stop.
- Wealth taxes produce anti-Semitism?? I’ll quote Larry Summers again: “Forcing the wealthy to spend could boomerang. If the wealth tax had been in place a century ago, we would have had more anti-semitism from Henry Ford and a smaller Ford Foundation today.” Henry Ford could have spent as much on anti-Semitism as he wanted to as it was. I think the problem Summers is identifying here has nothing to do with wealth taxes and everything to do with the fact that the super-wealthy are horrible people with vast amounts of power to propagandize. He does identify one crucial problem, though, which is that if a billionaire can get around the wealth tax simply by spending their money or giving it to charity, we might not accomplish our desired objective. All this amounts to saying, though, is that the rich are indeed very powerful and that it is hard to regulate their behavior without them finding some way around it, because they are pathologically committed to getting their way. (Interestingly, this buried premise is also present in arguments about minimum wages and regulations on landlords from a free market perspective: Employers “will just fire people”… because they’re monsters who would rather plunge workers into poverty than give up their profits. Under rent control landlords “will just neglect properties” because they don’t actually care about their tenants. They just care about money. Watch out for these buried premises in economic arguments because you’ll see them constantly and all they really confirm is that the rich are different from you and me.)
- Wealth taxes were abandoned in European Country X. I see this one constantly and I don’t get why I should care. It mostly seems to have been an enforcement problem, which is quite solvable actually, but I think it’s often used to imply that wealth taxes are “so radical that even Europe” had to abandon them. That’s not actually persuasive, because as any leftist knows, neoliberalism has been making inroads everywhere. So the fact that a European country abandoned a tax does not suggest to me that the tax was radical but that the general tendency toward conservative economic policy and political capture by the uber-wealthy is not a uniquely American phenomenon.
- “People would literally have to sell assets to pay the tax on the assets that they owned before the wealth tax was levied. That would be incredibly disruptive, so I think there are other ways to raise the revenues.” This is Hillary Clinton, being helpful as usual, and it’s not clear that what she’s saying is true. If you could turn over the assets to pay the tax, you wouldn’t have to sell them. Again, though, she’s telling a story. Saying the word disruptive and painting a picture of a world in which this is disruptive isn’t actually proof it will be disruptive. Pay close attention to how many economic arguments are just speculative fiction, all about what people will do in the imaginary-world of the speaker’s mind rather than what they do actually do according to the data we have about the world as it exists.
- Wealth taxes “will just” be evaded by clever accountants This is an argument for putting billionaires in prison for tax evasion, not an argument against wealth taxes. If we stop treating tax “avoidance” as separate from tax “evasion” and start getting tough on those who try to avoid paying their legally required share, we will quickly see the rich cough up.
Note that many of these are made as if they are economic arguments, sometimes by economists. But many of them are not, and we should always make sure that a given expert is speaking on something that we think they actually do have expertise in. An economist has nothing more interesting to say than you or I do about whether something is “constitutional” or “politically feasible.” They might have something to say about economic effects of a policy, but one needs to make sure they’re not just telling a story and actually have some examples that back up their point.
So as we go into the debate over how to tax wealth, and as the Bernie Sanders presidency tries to push through new redistributive initiatives, it is important to be prepared for the kind of bullshit arguments you’re going to see, and to understand why they’re bullshit. Let us by all means have a real debate about how to transfer power and wealth effectively from the rich to the non-rich. But let us not listen to silly crap about how “museums will have too much art,” “the Supreme Court will overturn it,” “you won’t get it done politically,” “unless inventors get to own multi-billion companies they will refuse to invent,” “it will cause Henry Ford to hate Jews more,” or “because criminals will break the law we shouldn’t have laws.” All of this smacks of desperation and suggests that the proponents of wealth taxes are correct: If you believe that the existence of billionaires is a kind of feudalism, where individuals have far too much concentrated power, then the correct thing to do is to make them turn over a portion of their wealth. We need to, as the Wall Street Journal says, do this “carefully,” because the people we are antagonizing would rather destroy the economy than pay their rightful share and give up a substantial portion of their power. But the goal is clear and many of the mainstream objections to it are pitiful.