Tax the Billionaires!

In a recent New York Times editorial, socialist economist Gabriel Zucman of Berkeley wrote “It’s Time to Tax the Billionaires.” Congresswoman Barbara Lee proposed a wealth tax, the Oligarch Act of 2023. Rep. Lee wants a yearly 8% tax on the “extreme wealth” (net worth) of the “aristocratic” rich. Our legislators in Sacramento have also proposed a wealth tax on “rich people.” Not quite as greedy as Rep. Lee, they only want to take 1.0% to 1.5% every year from millionaires and billionaires.

They think wealth inequality is bad because, as we all know, billionaire wealth comes from ill-gotten gains, it causes poverty, and we have to even things out to help the other 99% and preserve democracy. 

As Barbara Lee says, “It’s time the billionaires and ultra-wealthy pay what they owe to the American people.” Apparently, that billionaires make our lives better doesn’t matter.

People advocating wealth taxes really dislike successful people. And these taxes give them power, a very attractive thing. Unfortunately they are ignorant of economics and the unintended consequences of their acts. They are ends-justify-means types who have created havoc and poverty since the rise of civilization.

The proper response to wealth inequality is: so what. It is a meaningless strawman. 

Mega-billionaires Jeff Bezos (Amazon), Elon Musk (Tesla), Bill Gates (Microsoft), Steve Jobs (Apple), Mark Zuckerberg (Facebook), Brin & Page (Google), and Larry Ellison (Oracle) didn’t become the richest people in the world by breaking the backs of labor, stealing market share, or overcharging us for shoddy goods. They got rich because we made them rich. Voluntarily. We like what they are selling. They are brilliant entrepreneurs, the folks who created businesses that changed our world for the better. We need people like them to move us forward. 

There has never been a case in the history of the world where the redistribution of wealth has alleviated poverty. In fact, most often it has resulted in more poverty and totalitarianism. As economist Thomas Sowell says, “Socialism in general has a history of failure so blatant that only an intellectual could ignore or evade it.”

The only countries in history that have alleviated poverty are capitalist countries. The greatest period of wealth generation in history, what economist Deirdre McCloskey calls The Great Enrichment, was a result of the rise of capitalism and free(r) market economies. Any way you look at it, the standard of living for Americans and the capitalist world has skyrocketed over the last 120+ years. 

The reason we are still the most prosperous country by most meaningful measures is because we have freedom, including the freedom to make money without stealing it from other people. This has created a dynamic economic infrastructure that provides capital to entrepreneurs to innovate and bring us a dazzling variety of products and services that make our lives better. It also makes entrepreneurs wealthy. We should thank them.

The wealth they want to tax isn’t gold bars sitting in vaults: It is capital, the thing that funds the drivers of progress. If you tax away wealth, you destroy capital because government doesn’t create much, it just spends money. Less capital means less growth. Less growth leads to a slower economy which means people get poorer, which is what has happened whenever these schemes have been tried.

Besides, millionaires and billionaires already pay more than their fair share of taxes. The top 1% (income) pay 46% of all income taxes. The top 10% pay 76%. Let me put that into perspective. The IRS collected about $2.1 trillion of income taxes in 2021 (latest data) from 153.5 million taxpayers. The top 1% (1,536,000 taxpayers) paid 46% or about $1.0 trillion of that. Drilling down a bit more, the top 0.1% (only 154,000 taxpayers) paid 25% of all taxes, or about $542 billion of the $2.1 trillion. A system that relies on the very few to pay for the many is a fragile system.

So by also taxing the net worth of rich folks (i.e., wealth generating capital), productive capital gets transferred from entrepreneurs to the government which will spend it. Once spent you can’t get it back. Since Lyndon Johnson’s War on Poverty in 1964, for example, the trillions spent have not budged the poverty needle. 

How long do you think the economy will thrive when you waste capital and disincentivize the people who create wealth and prosperity? The result will be a slippery slope of bad consequences from ignorant acts.

It reminds me of Mark Twain’s quip when his friend Henry Rogers of Standard Oil was accused of having “tainted money,” Twain replied, “His money is tainted, it taint mine and it taint yours.”