While I often
agree with the work and conclusions of the Hoover Institution’s fellows, that
is not always the case. I find Economist John Cochrane’s argument against a 5%
billionaire wealth tax to be weak and ineffective. The 5% tax was proposed by
Bernie Sanders and Ro Khanna, two far-left politicians with whom I often
disagree. I may agree with taxing billionaires 5%, but I likely would not agree
with these two politicians’ plans for using the proceeds.
Cochrane argues that such a tax would shift capital
from investment to consumption, since billionaires have the bulk of their money
not in cash, but in investments. This is true, but it is also true that
consumption also stimulates investment. Thus, his first argument is that it
would disincentivize investment. According to Forbes, there are 989
billionaires in the U.S., or .00029% of Americans. Thus, it would be a tax, not
on the 1% as Bernie likes to say, but on the .00029%. Billionaires’ money is
mostly invested in their own companies. For Elon Musk, that is Tesla, SpaceX,
Starlink, the Boring Company, Twitter/X, PayPal, OpenAI, Neuralink, and many
others.
Cochrane is a bit audacious to say
that “inflation adds another wealth tax.” This is true, but it is a
truly minuscule percentage of billionaires’ income compared to the average
person or the poor person who actually buys less, drives less, and goes without
some things due to inflation.
Cochrane argues that a wealth tax
would take away billionaires’ ability to take risks and that such risk-taking
has been a boon to our economy in the past.
“High-risk investments is what produced America’s
prosperity. Low-risk, low-reward, small-scale European investments produced
European stagnation.”
There may be some truth to that,
but Europe is certainly not a place where poverty is prevalent.
“Redirecting that wealth to social spending lowers
national investment and raises national consumption dollar for dollar.”
So does any government tax on
anyone. Cochrane seems to be echoing Elon Musk’s boast that his own value is
that he is an expert at allocating capital. His high purchase price of Twitter,
or X, turns that argument on its head.
Below, he argues that such a tax
would result in growth of tax avoidance schemes. That is true, but we can work
to close such loopholes. I would say to the billionaires: “Do your national
duty and pay your taxes without trying to hide your money, like the rest of us
do.”
“Avoidance. Elon Musk’s $42 billion proposed tax bill
would pay for a lot of tax lawyers, accountants, and lobbyists. What do they
do? Take businesses private, argue with the IRS about what they’re really
worth, hide individual ownership and value in complex cross-linkages, trusts,
and LLCs.”
“In fact, structuring businesses to avoid taxes rather
than generate profit might be the most insidious effect of high taxation.”
He also rails against the estate
tax, which he says is also a wealth tax. I am not competent to evaluate that,
but it does seem a bit high as he states it.
He finishes his rant with the
following:
“The wealth tax is not about economics at all. It’s
about envy. It’s about destroying the billionaires. And it’s about grabbing
their supposed political power for the benefit of the government.”
“They want to get rid of the billionaires, even if we
get rid of the companies and economy that they created.”
I do not believe that is true. It
is not about envy, but it is about fairness. Neuroscientists sometimes say we
have a built-in “sense” of fairness. Billionaires really stress that sense, and
we see it as unfair. While it may be true that leftists and socialists are
indeed envious of billionaires and some want to hurt the rich more than to help
the poor, most of us are not like that. Helping the poor is far more important
than harming the rich. A little taxation, a tweak of our mixed economy, which
is not unfettered capitalism, but capitalism with some regulation of its wealth
effects through mechanisms like taxation, does not result from envy but
fairness.
The world’s total wealth is
estimated to be about $600 trillion. When one human (Musk) among 8.3 billion
people can have 0.167% of the total wealth of the world, the obscenity of the
super-wealthy is on display. Defending such unfairness, as Cochrane seems to
do, is an affront to our sense of fairness. Tax them!
References:
The
Hidden Cost of a Federal Wealth Tax: How a 5% tax on billionaire wealth could
weaken investment, encourage tax avoidance, and reduce future economic growth. John
H. Cochrane. The Grumpy Economist Weekly Rant. Hoover Institution. September 9,
2026. The
Hidden Cost of a Federal Wealth Tax
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