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Economics

If Wealth Is Justified, so Is a Wealth Tax

Dec 10, 2019 Katharina Pistor

Not surprisingly, American billionaires have dismissed recent wealth-tax proposals as an affront to the entrepreneurial spirit to which they attribute their massive wealth. But the ultra-rich never would have their great wealth without legal subsidies from the state and reliable enforcement by the courts.

NEW YORK – Economic inequality has moved to the top of the political agenda in many countries, including free-market poster children like the United States and the United Kingdom. The issue is mobilizing the left and causing headaches on the right, where wealth has long been viewed as worthy of celebration, not as demanding justification.

But today’s concentrations of wealth do demand justification. In 2018, Forbes listed three billionaires among its top ten most powerful people in the world. Next to the heads of states of Chinese President Xi Jinping, Russian President Vladimir Putin, US President Donald Trump, and German Chancellor Angela Merkel, one finds not only the Pope, but also Amazon founder Jeff Bezos, Microsoft co-founder Bill Gates, and Google co-founder Larry Page. All three owe their power not to public position or spiritual influence but to private wealth.

As contenders in the Democratic primary for the 2020 US presidential election, Senator Bernie Sanders of Vermont and Senator Elizabeth Warren of Massachusetts have promised to impose new taxes on the super-wealthy. Warren’s wealth-tax proposal – a levy of 2% on every dollar of net worth above $50 million, rising to 6% for fortunes greater than $1 billion – has ruffled billionaires’ feathers. According to Gates, he has paid more in taxes than almost anybody – some $10 billion. And while he would consider it “fine” if that figure had been doubled to $20 billion, he believes a much higher tax would threaten the incentive system that led him (and others) to invest in the first place.

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0 Comments on this paragraph, 33 Comments on this article

Alex Aslanidis Jan 24, 2020

Excellent article.
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shayre Jan 6, 2020

Sukh's Thoughts: Oh, all the things we are going to "learn" (AGAIN), now that the benefits of hegemony, developed-world-led globalization and control over oil-producing countries is coming to an end.....

Wealth will be taxed, not because this money is needed to fund government spending (see MMT), but because, with the end of hegemony, it is no longer pragmatic to implement policies that ensure wealth becomes concentrated domestically (the vast majority of a country's wealth parked in the hands of its 0.1%). So, taxing this wealth back is about creating a more just, fair, and cohesive society. AFTER the end of hegemony, this is the pragmatic option to pursue.
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Per Kurowski Jan 2, 2020

Also based on conveniently ignoring that wealth is all invested in assets for which purchase power/money was given up when purchased, or was never received, so redistributing wealth requires selling assets, which could have deflationary consequences
http://perkurowski.blogspot.com/2018/10/redistributing-wealth-is-not-as.html
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Mauricio Duran-Loriga Dec 20, 2019

Fifht Amendment:The government can't prosecute someone more than once for the same crime.

However, the government can endlessly tax the same assets year after year. That should be ruled unconstitutional. If income is taxed only once, why savings are endlessly taxed?
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Michael Harrington Dec 16, 2019

Too true, in recognizing the real threat to democratic capitalism. There must be a way to find our way back to equilibrium after benefitting the asset-rich with financial policies for the last 40 years. A wealth tax is probably necessary, but the form and function of a wealth tax matters. Certainly, the tax treatments of residential real estate and hedge funds/private equity should be reevaluated. And the estate tax.

The estate tax is universally unpopular in democratic societies, so it must be reconceptualized in terms of fairness. We want to encourage the getting of wealth through productive enterprise, but discourage the hoarding of that wealth. I would suggest a way that incentivizes the wide distribution of inherited capital as a means of avoiding an onerous estate tax. In other words, distributing a $100 million estate in endowments no larger than $5 million to avoid 100% of the tax. This would serve to recycle the massive transfers of wealth under the fiat money, credit bubble policies of the past 40 years. It seems a better market-based "democratic" solution than creating billion-dollar philanthropies to channel resource allocation.
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Robert Oser Dec 16, 2019

May be a Wealth Tax is justifiable but it is a voluntary tax because such a tax is the easiest tax of all to avoid. If Katharina Pistor knows how to impose an enforceable Wealth Tax she should tell the OECD and all the tax authorities in the Western World; she will be loved forever.
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Donald Devine Dec 16, 2019

The wealth tax has come into focus because great wealth is largely passive and represents accumulated gains which have not been recognized by taxing authorities. Prior to or upon death these accumulated gains are transferred to charitable foundations to limit inheritance taxes, thus depriving society of any tax benefit from these gains. For example, both Buffet and Gates have large passive stock positions in their companies (passive with enormous accumulated but unexercised capital gains) which have been pledged to the Gates Foundation ensuring minimum taxation while maximizing their control over how the funds are used by Gates, Buffet and their administrators. Without taxing wealth more money could be generated from the accumulated wealth of billionaires through changes in the tax code and how charitable contributions are managed by the ultra wealthy.
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Steve Stein Dec 15, 2019

The notion that a wealth tax will remain confined to the top ".1 %" - or so - is naïve. Like the income tax in the early twentieth century, it will metastasize. As the extremely wealthy move much of their net worth to more tax-friendly countries, the government will nevertheless get hooked on whatever new tax revenue is brought in and will reflexively seek more of it. So the burden will fall not on the few billionaires at the very top, but on a far broader segment of productive society.

Will incentives to keep producing thereby be diminished, while the least productive aspects of the public sector continue to grow?

History offers little reason to be optimistic that 'this time will be different.'
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Ane Yme Dec 15, 2019

You may also want to mention that most of their wealth is due to their companies’ stock price and not their revenue, and that, in turn, extraordinary growth in asset prices in the last 10 years is due to free flow of money provided by the State.
- Claudio Migliore Dec 16, 2019
  
  Essentially, then, it's like adding water to someone's soup and then claiming a plate of the watered down soup. Besides, paper wealth is known to evaporate somewhat when liquidated and, furthermore, the tax does not castigate the billionaires' consumption, only the ability to create wealth and innovation through investment.
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Claudio Migliore Dec 15, 2019

I have been wanting to write on the issue of wealth, inequality and taxation for some time, and Project Syndicate has provided plenty of opportunity to do so, since it tends to publish, among other admittedly very worthy material, a sort of pseudointellectual job bulletin board for policy advisors peddling their service to hyperactive policy makers.
So it is just happenstance that I comment here on Ms. Pistor’s piece, which is not much worse, I think, than Piketty’s or the others that saprophyted on his wake.
Further, I will not address the direct philosophical point of the appropriateness of wealth confiscation, other than pointing out the sophism of arguments that are devoid of any measuring stick. Iin fact, it may be right that Mr. Gates could not have happened without the lawmakers and the cops who came before him, but what percentage does that justify taking from his production? Suppose the government took 50% of his wealth. After that, could you still make the same argument, that he stood on the shoulders of cops and, then, decide you can take another 50%, and after that? Still another half?
However, the thing I find more preposterous about the promotion of wealth taxes is their total lack of any meaning whatsoever.
Let us say we take, as some propose, two or six percent of Mr. Bezos’s “wealth”. That would mean that he would have to sell a substantial portion of Amazon stock. Forget for the moment that the stock would tumble, so he would have to sell some more to put together the money he needs. Forget that this would make him pay more than what would be the nominal assessment. Forget that many far less wealthy people would be hurt in the process.
The point is that Mr. Bezos would probably not consume one single burger, Epipen or home square foot less because of the tax. In fact, he probably would not change his consumption at all. Hence, no concrete economic resources would be made available for the state to distribute to the public.
Through accounting tricks, the higher tax revenue would provide the government cover to spend more, for sure, but the aforementioned burger, Epipen or home square foot would have to be taken from someone else via price crowding, i.e. inflationary stimulus.
In other words, the accounting trick of taxing Mr. Bezos amounts to just fiscal stimulus plus printing some money.
One thing the policy would achieve for sure is that the above two gentlemen, plus a lot of other less politically exposed wealthy individuals, would have less to invest. Not need to feel sorry for them, screw them if they cannot invest and earn money, right? Who cares, for instance, if Mr. Musk could not invest his Paypal wealth in Tesla? Or how about all the venture capital that has fueled so much innovation and prosperity in the US?
More generally, the engines of prosperity and uplifting would not happen without the investment of those who have wealth. It would be useful to assess whether this is the kind of spending (in productive investment I mean) that needs to be sacrificed to provide burgers, Epipens or home square feet, rather than using better the already substantial wealth that governments have at their disposal today or curbing the habit of protecting the rents of regulatorily protected sectors, most notoriously the healthcare profession.
- Jay Kay Dec 15, 2019
  
  Income tax was imposed as an emergency measure on the ultra rich during a time of war.
  
  Of course starting with the rich was only ever a ruse to begin the salami slicing process that would ensnare essentially everyone in the tax system...as the trans national Globalist Elite quietly exited the income tax system.
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Ian Maitland Dec 15, 2019

Yale economist William Nordhaus studied the returns from technological advances from 1948-2001 and estimated that the share going to the innovators was 2.2 %.

Oh, but no, to hear Pistor it wasn't innovators that created that wealth. It was the law. And incentives don't matter for innovation and investment. Let's confiscate that last 2.2% and leave innovation to lawyers!

These specious arguments are just threadbare rationalizations for envy -- and, even worse, the cultivation and exploitation of envy to advance her political and professional ends. The biggest losers from Pistor's war against wealth will be the usual ones -- the poor and the sick and the rest of us.
- Jay Kay Dec 15, 2019
  
  Being in the innovation space for the last two decades, I can say that looks about right, or maybe even a bit high. I would be delighted to get 2% of the value of my latest invention...
  
  The vast bulk of the population, including those in academia, simply have no idea of the amount of work, resources, and risk taking, that is required to push a new idea out into the market.
  
  At the very least 95% of the innovations that get funding disappear without a trace, taking the investors money with them.
  
  Even in mature industries such as movie making and oil exploration, with access to essentially unlimited development funds and the best equipment and the best people on the planet, the hit rate is...5%. That is 95% of the projects are budgeted to fail and do fail. Such are the risk involved.
  
  So yeah, 2% sounds terrible as return to the innovator, but it in reality there are very good reasons for things being the way they are.
  - Ian Maitland Dec 15, 2019
    
    Out of my own self-interest, as well as my affection for humanity, I hope your invention will get you at least 2% of its value, and ideally much more. Think of how much better a place the world will be if innovators got something closer to the entire social value of their inventions!
    
    But no, Bernie and Katharina believe that “If you’ve got a business — you didn’t build that. Somebody else made that happen.” (Presumably the lawyers did). They want to build what Maggie Thatcher called a "socialist slum" in America.
    
    Have you noticed? If a new drug saves hundreds of thousands of lives, they put on sackcloth and ashes and bewail the fact that someone is making a fortune out of other people's misfortune!
    
    With luck someone some day will invent a drug to cure them of their misanthropic phobia about inequality.
    - Jay Kay Dec 16, 2019
      
      We are on the same side of the argument.
      
      My point is that a great idea (even speaking as the idea generator and IP owner) is typically only a very small part of the overall offer to the market. It's great having a great idea, but you have to give credit to the risk capital people who throw money at these things knowing that 95% + are going to fail...
      
      One thing I would change is patent law.
      
      Consider:
      
      - I write a pop ditty in ten minutes or write stuff - and instantly get granted (essentially) global copyright (IP) protection, for life plus 70 years, with zero fees, and without even having to make an application or fill in a form
      
      - I spend half a billion dollars searching for a cure for cancer. To get IP protection for at most 20 years, for a drug that is going to take 10 years to get to market, I have to:
      -- 1 spend thousands of dollars on patent applications
      -- 2 spend tens of thousands of dollars on patent lawyers
      -- 3 spend a fortune renewing the patent applications every year that the application is active or that the patent is granted
      -- 4 fight the examiner to get the patent through, and pay a fee every time the application goes in for examination. One of my patents took 10 years to get up....
      - 5 repeat the process in every country that I am seeking patent protection! Whilst there is such a thing as an international patent application, the part A of the patent process if you like, the part B of the patent application process is country specific! That is multiplication of fees, multiplication of examiners....
      -- 6 argue the patent examiners in every country to a win. Believe it or not you get different arguments in every country, and your granted patents are often different in every country!
      -- 7 deal with the oceans of tears of the Snowflakes who abhor the limited IP protection that patents provide, but love copyright!!!!
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Prakash RP Dec 15, 2019

As I see it, the argument that ' If Wealth Is Justified, so Is a Wealth Tax ' is a democratic socialist sophistry that outright disregards the fact that lawful wealth ( wealth of Amazon chief, a CEO's salary, Christiano Ronaldo's earnings, etc ) was amassed by lawful means, and the fact that amassing wealth is Not criminal. Any questions ? I invite questions.
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Joe Ryan Dec 15, 2019

In addition to legally creating and enforcing monopolies, another anti-social way that the state helps create billionaires is to fail to enforce existing laws against illegal monopolies, such as Microsoft.
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Carl Buzawa Dec 15, 2019

The problems with a wealth tax are legendary. Difficult to administer, lots of ways to evade, tons of side effects such as forced selling and breaking up of firms to generate needed cash, the natural desire of many to move to other regimes to avoid something that over one generation would destroy a family’s wealth. That is why every country that has tried this has abandoned such proposals. Surprised that the Prof doesn’t know this and or consciously chose not to mention this.

On top of the logistics issue, consider that certain lefty candidates like Warren use this as a catch all to avoid saying that they are really proposing a mass tax increase on everyone. Assume reasonably, that as a result of these taxes the stock market tanks, so income, which IS being taxed now generates less tax revenue, than assume that the 6% tax is ruthlessly collected. How many years before this revenue source is completely eradicated, e.g. fortunes are less than the targeted $1 Billion. Who picks up the tab for Medicare for all then in say 10 years when this is an entitlement that everyone expects and there are no more billionaires to double or triple tax....you guessed it every other taxpayer now facing MASSIVE tax increases...which of course the good Professor or Liz Warren refuse to a knowledge.
- Carl Buzawa Dec 15, 2019
  
  Also, the good law professor totally ignores the serious constitutional issues involved in a wealth tax. To see these issues explained in more detail just read the New York Times article, published just last month where two self described leftist law professors state that this tax would likely generate exactly $0 of revenue as it would be declared unconstitutional as a “direct tax” that has to be apportioned by population only across each of the 50 states and also might be regarded as an unconstitutional “taking” without fair compensation under the 5th Amendment as such property was ALREADY subject to taxation.
  
  This is the real danger of such articles. They propose things to redistribute assets and fund their desired social programs, but base them on wholly impractical means.
  
  Can you imagine if Warren were elected on the basis of a wealth tax generating money to pay for Medicare for All but find out that not only there are practical problems that led Germany, France, Sweden AND every other European country to abandon the wealth tax, but also it was unconstitutional so that we would not even reach the point of inevitable failure as seen in other countries. The USA would have elected a President that, to keep her primary promise of Medicare for all, let alone other new social spending, relied on an unconstitutional AND impractical tax.
  
  Want to bet that while blaming Republicans the entire way, she would then propose massive tax increases on everyone ...which, she knows if she proposed prior to an election (or her party’s nomination) would totally destroy her campaign?
  
  Far better to stick to candidates that don’t propose unworkable and potentially unconstitutional solutions even if they aren’t wearing “progressive” colors
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John Alexander Dec 15, 2019

"But the ultra-rich never would have their great wealth without legal subsidies from the state and reliable enforcement by the courts."

Absolutely. Or put it another way: there would be no billionaires if no tax were other than progressive, i.e. if there were no regressive taxes at all and the income tax curve were asymptotic to 100%. For the rest of eternity it will be maintained that in such circumstances economies around the world would collapse owing to lack of incentive, but this view of the matter is simplistic in the extreme. It can be argued quite coherently, and consistently with the principles of differential and integral calculus, that the sum of financial incentive across a population will be at a maximum if taxation is an entirely progressive affair.
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Luis Arenzana Dec 15, 2019

For a professor at a Law School, it's shocking that she fails to understand that the corporation, which has a legal persona, has already paid Federal and state corporate taxes to protect its property rights. To argue that the shareholders need to pay again for this protection is the basis of a different kind of political organization. The Sopranos come to mind.
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S Kaleberg Dec 14, 2019

Private property is a government service. People should pay for it. Otherwise, they shouldn't complain when someone takes it away from them by fraud or at gunpoint.
- Jay Kay Dec 15, 2019
  
  Government is a service.
  
  Those that depend on government the most should pay for it, and they they should pay for the damage that government creates to the freedoms and lives of other citizens.
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Lester Golden Dec 14, 2019

Here's a better idea than a wealth tax: reverse the trend toward increased inequality by embedding the policy outcome in the tax system: index the tax rates of those who benefit from startup unicorns/IPOs and central bank policy driven asset bubbles to the gini coefficient. Lower income taxes on the top 2-3% income tranches if the gini coefficient drops, raise them if the gini coefficient rises. Embed the indexation in tax accounting software packages like Turbo Tax so indexation by gini coefficient becomes a fait accompli that doesn't create an annual political argument. Frame it as a purely technical change that's a two way street. Lower inequality will lower corporate and high net worth individual tax rates. This idea is the reverse of the usual fiscal policy idea: it's outcome-driven and easy to implement. Nobody across the political spectrum says openly he's in favor of more inequality. This policy idea would force its opponents into looking like they favor increased inequality. Aphorism from my late father's multimillionaire friend: "I like paying taxes. Paying taxes means I made money."
I'm an angel investor in eight startups and the founder of another. I have never, ever considered tax rates before making an investment.
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Gunnar Eriksson Dec 12, 2019

The reaction to the tax proposal is a modern type of "Luddite"; If you mess with my rent seeking machine I'll throw sand into the machine.
- Ian Maitland Dec 15, 2019
  
  The tax does not distinguish between wealth from rent seeking and wealth from creating social value. Do you deny that the latter ever happens?
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David Donald Dec 12, 2019

Between what Pistor explains in The Code of Capital (law constitutes all wealth and protects it - and this law is often originally non-local and was shaped aggressively by well-paid legal teams) and what Mazzucato explains in The Entrepreneurial State (publicly funded programs and infrastructure made most of the new, IT wealth possible), there is little credit left for the 'great men' other than being in the right place at the right time, having some talent and diligence, and having an above average self-centered desire to take as much as they possibly can for themselves. When others propose to use democracy (another legal tool) to take some back, they then cry foul (essentially turning to the professionals who fabricated their wealth in the first place to fabricate a stasis). Pistor's analysis has much in common with that of Derrida, who explained with regard to power: "one of the most important rules of the game is that the game must appear to stop."
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Bernhard Kopp Dec 11, 2019

Rather than taxing wealth one could mandate that anybody with a net worth above, maybe 10 million dilutes his equity by issuing participation rights ( non-voting shares or other instruments yet to be defined ) in favor of health insurance and retirement benefits funds. Everybody with personal net worth of less than a million ( separate from the self-occupied residential property ) would, against a modest contribution of his own, be able to participate in such funds. 1% per year on the total net worth as suggested above might materially alter the wealth distribution within a generation.
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Tad Furtado Dec 10, 2019

Without the rule of law and legal enforceability, the über wealthy would be free to hire their own security teams / military units to protect their assets and demand compliance with contracts. The less well-off would not have this protection, which would lead to greater and not less inequality.

I understand the it-take-a-village aspect to the you-didn’t-build-that premise, and there is merit to it of course, but if the critical ingredients to great success are supplied by the state then why have not many more people achieved it?
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