The Billionaires Are Getting Nervous

Bill Gates and others warn that higher taxes would lead to lower growth. They have their facts backward.

By 

The editorial board is a group of opinion journalists whose views are informed by expertise, research, debate and certain longstanding values. It is separate from the newsroom.

Bill Gates in New York on Wednesday.
Credit…Calla Kessler/The New York Times

When Bill Gates founded Microsoft in 1975, the top marginal tax rate on personal income was 70 percent, tax rates on capital gains and corporate income were significantly higher than at present, and the estate tax was a much more formidable levy. None of that dissuaded Mr. Gates from pouring himself into his business, nor discouraged his investors from pouring in their money.

Yet he is now the latest affluent American to warn that Senator Elizabeth Warren’s plan for much higher taxes on the rich would be bad not just for the wealthy but for the rest of America, too.

Mr. Gates, the co-founder of Microsoft, suggested on Wednesday that a big tax increase would result in less economic growth. “I do think if you tax too much you do risk the capital formation, innovation, U.S. as the desirable place to do innovative companies — I do think you risk that,” he said.

Other perturbed plutocrats have made the same point with less finesse. The billionaire investor Leon Cooperman was downright crude when he declared that Ms. Warren was wrecking the American dream. Jamie Dimon, the chief executive of JPMorgan Chase, complained on CNBC that Ms. Warren “uses some pretty harsh words” about the rich. He added, “Some would say vilifies successful people.”

Let’s get a few things straight.

The wealthiest Americans are paying a much smaller share of income in taxes than they did a half-century ago. In 1961, Americans with the highest incomes paid an average of 51.5 percent of that income in federal, state and local taxes. In 2011, Americans with the highest incomes paid just 33.2 percent of their income in taxes, according to a study by Thomas Piketty, Emmanuel Saez and Gabriel Zucman published last year. Data for the last few years is not yet available but would most likely show a relatively similar tax burden.

The federal government needs a lot more money. Decades of episodic tax cuts have left the government deeply in debt: The Treasury is on pace to borrow more than $1 trillion during the current fiscal year to meet its obligations. The government will need still more money for critical investments in infrastructure, education and the social safety net.

This is not an endorsement of the particulars of Ms. Warren’s tax plan. There is plenty of room to debate how much money the government needs, and how best to raise that money. The specific proposals by Ms. Warren and one of her rivals, Senator Bernie Sanders, to impose a new federal tax on wealth are innovations that require careful consideration.

But a necessary part of the solution is to collect more from those Americans who have the most.

And there is little evidence to justify Mr. Gates’s concern that tax increases of the magnitude proposed by Ms. Warren and other candidates for the Democratic presidential nomination would meaningfully discourage innovation, investment or economic growth.

The available evidence strongly suggests that taxation exerts a minor influence on innovation. Experts have an imperfect understanding of what drives innovation, but taxation isn’t in the same weight class as factors including education, research and a consistent legal system.

Congress has slashed taxation three times in the past four decades, each time for the stated purpose of spurring innovation, investment and growth. Each time, the purported benefits failed to materialize. President Trump initiated the most recent experiment in 2017. The International Monetary Fund concluded this year that it had not worked.

Moreover, while higher tax rates may weigh modestly against innovation and investment, that calculus is incomplete. It ignores the question of what the government does with the additional money. It also ignores the possibility that higher taxes could result in more innovation.

A study of American patent holders found that innovators tend to come from wealthy families, to grow up in communities of innovators and to receive high-quality educations in math and science. Mr. Gates, one of the most successful entrepreneurs in American history, fits the profile: He grew up in an affluent family and received the best education money could buy.

The implication of that study, and related research, is that public investment, funded by taxation, could give more kids the kinds of advantages enjoyed by the young Mr. Gates.

There is no doubt that it is theoretically possible to raise taxes to prohibitive heights: If people had to pay a tax of 100 percent of the next dollar they earned, they would be likely to call it a day.

But the alarm bells are out of all proportion with Ms. Warren’s plan. Describing his concerns on Wednesday, Mr. Gates at one point suggested he might be asked to pay $100 billion.

The Warren campaign calculates that under Ms. Warren’s plan, Mr. Gates would owe $6.379 billion in taxes next year. Notably, that is less than Mr. Gates earned from his investments last year. Even under Ms. Warren’s plan, there’s a good chance Mr. Gates would get richer.

To his credit, Mr. Gates has said that he thinks the wealthy should pay higher taxes. But that’s not how he behaved on Wednesday. He can demonstrate that he’s serious about tax increases by setting aside the hyperbole and engaging in principled and factual debate about the details. SOURCE

 

Should billionaires continue to exist?

How taxing wealth could tackle both wealth concentration and the climate crisis

 

Wealth taxation is back on the progressive political agenda. It is both a refreshing new idea and a return to vogue of a policy established decade ago in Europe. Some remember it as part of François Mitterrand’s 110 propositions pour France, a joint electoral platform in 1981 with the Communist Party that carried him into the Élysée Palace. The solidarity tax on wealth survived multiple right-wing presidents, only to fall recently to President Macron.

Even so, it is an idea whose time has come in North America. It continues to exist in three OECD countries, and both Bernie Sanders and Elizabeth Warren, two of the leading three Democratic contenders for U.S. president, have a plan to tax wealth in their platforms. The NDP also included a proposal for a wealth tax in its 2019 election platform, which was met with backlash and bad-faith critiques from the usual suspects.

Matthew Lau, who has written for the right-wing Fraser Institute and Atlantic Institute for Market Studies, called it “class warfare” and “confiscatory” in a Financial Post column. This was followed by another piece in the same publication by the Montreal Economic Institute’s Gael Campman, who claimed taxing wealth would be a “tragic mistake,” seemingly oblivious to the existence of property taxes in Canada. Calling it a “demagogic ploy that ends up being counterproductive,” Campman brings up the prospect of the widely discredited “Laffer effect” of falling tax revenues from increasing taxation.

In a slightly more serious challenge, Robin Broadway and Pierre Pestieau call the wealth tax “Over the Top” in their recent C.D. Howe paper of the same name, stating that it isn’t needed, and it would be more efficient to raise taxes on capital gains. Why not do both? Recent studies such as the CCPA’s Born to Win have shown that Canada’s wealthiest 87 families now own the same amount as the lowest-earning 12 million Canadians, which is approximately equivalent to what everyone in Newfoundland and Labrador, Prince Edward Island and New Brunswick collectively owns. In Canada, just two billionaires (David Thompson and Galen Weston) own as much wealth as a third of Canadians.

A bold tax policy package is sorely needed to address this kind of wealth hoarding, which contributes to soaring inequality. Along with a host of other progressive measures, the wealth tax in particular sits in the enviable position of being at the nexus of both good policy and good politics.

According to a recent Ipsos poll, 67% of Canadians believe that “Canada’s economy is rigged to advantage the rich and powerful.” Another poll conducted by Abacus Data found that 67% of Canadians also support the idea of a wealth tax, including 58% of Canadians self-identifying as “right-wing” and 64% of those who say they are in the political “centre.”

***

In his critique of the NDP’s modest wealth tax proposal, Campman alleges it would force poor farmers to sell their land and cause capital flight. Lau asks how the tax could work when wealth in financial assets can vary day by day depending on the stock market. As the OECD has pointed out, there are ways of getting around all these problems.

The best wealth tax systems have a series of exemptions regarding most forms of middle class wealth, such as pensions and primary homes, as well as exemptions for agricultural property. Assessments can occur every 3–5 years with options to apply for reassessment if a significant change in value occurs, and payments can be made in instalments for those taxpayers facing liquidity constraints.

Wealth taxes can apply to both domestic and international assets, be tied to citizenship and be negotiated by international tax treaties—to eliminate the incentive for capital flight. As proposed by Elizabeth Warren, you can introduce an “exit tax” at the same rate as an estate tax to seize assets from those who do choose to renounce their citizenship. With a rigorous enforcement regime, along with legislation to tackle tax havens, taxing wealth isn’t a pie-in-the-sky or unrealistic idea. It just takes political commitment and good policy design.

Casting aside the nitty gritty, the fundamental question we really should be asking ourselves when we design our wealth tax is should we allow billionaires to continue to exist?

Gabriel Zucman and Emmanuel Saez, two economists at the University of California, Berkeley who advised Elizabeth Warren on her wealth tax proposal, write that the “revenue maximizing rate” runs as high as 6.5%—far beyond the NDP proposal of 1%. According to the economists, such a low rate would provide permanent revenues due to its quite limited effect on wealth concentration. Higher rates of wealth taxation, say, up to 10%, would more effectively dismantle entrenched wealth concentration over time with the trade-off being the loss of a permanent and reliable source of tax revenue.

Bernie Sanders’s recently unveiled wealth tax plan would cut in half the wealth of the typical billionaire over 15 years, according to Saez and Zucman. When the New York Times interviewed Sanders about his plan, they asked if he thought billionaires should exist in the United States. “I hope the day comes when they don’t,” he responded, adding, “It’s not going to be tomorrow.”

Sanders’s wealth tax (see box) is much more aggressive and much more steeply progressive than Warren’s plan, which begins at a 2% tax on wealth above US$50 million and adds an additional 1% surtax above the billion-dollar mark. The revenue differences are large: over 10 years, Warren’s plan would raise US$2.75 trillion while Sanders’s would raise US$4.35 trillion. The other significant difference is how the Sanders plan obliterates wealth concentration while Warren’s plan has a much more limited effect due to the fact that the wealth of the richest Americans grows at an average rate of 6.6% a year.

By comparison, the NDP’s plan for a 1% flat tax rate on wealth above $20 million seems quite modest. The Parliamentary Budget Officer estimates the NDP proposal would rake in approximately $70 billion over 10 years, a value that includes the assumption that revenues from the wealth tax will be reduced by about 35% due to tax avoidance.

Rather than being “confiscatory,” as Lau suggests, Saez and Zucman write that “the marginal utility of a billionaire’s wealth is close to zero” and therefore “the revenue consequences of taxing billionaires outweigh the welfare consequences on billionaires.” Imagine for a moment what we could do if Canada plowed $70 billion into reducing poverty, fighting climate change or tackling the housing crisis. Canada’s oil barons can manage with one less yacht.

***

We can see that a wealth tax would be good for redistribution. What of wealth concentration? Should we not also tax inheritances in order to stop the out-of-all-proportion pooling of family wealth through massive intergenerational transfers? The issue here is political. Sometimes inheritance taxes poll poorly, even when the tax only targets the passing down of unearned wealth. Even so, should we continue to allow oligarchs to control so much wealth and power while other Canadians continue to live in poverty?

The proper design of any wealth tax system ought to both balance revenue generation and target wealth concentration. Which is why if we swear off an inheritance tax, we should be jacking up wealth tax rates. And if we shy away from steeply progressive wealth tax rates, we need to at least implement an inheritance tax.

French economist Thomas Piketty, best known for his best-selling book Capital in the 21st Century, has just put out a new book entitled Capital and Ideology. In it he proposes a wealth tax with a rate that goes as high as 90% for those worth over two billion euros (almost $3 billion). He also states that billionaires actually harm economic growth and should be completely taxed out of existence. In a world in the midst of a climate emergency, it may also simply be necessary.

Piketty writes in Le Monde that “it is increasingly clear that the resolution of the climate challenge will not be possible without a strong movement in the direction of the compression of social inequalities at all levels.” This is because, “at world level, the richest 10% are responsible for almost half the emissions and the top 1% alone emit more carbon than the poorest half of the planet. A drastic reduction in purchasing power of the richest would therefore in itself have a substantial impact on the reduction of emissions at global level.”

When designing our wealth taxes, we should perhaps consider not only their redistributive power but also how they can attack the entrenched power of economic elites—and how this might help us save the planet along the way. As Piketty suggests, a wealth tax could be instrumental in shifting carbon intensive and socially useless elite consumption patterns.

Looking forward into the next decade, when large-scale economic decarbonization is on the agenda, we should also ask ourselves if this should mean moving toward a billionaire-free world. In the future we want to build, if we are asked the question, “Should billionaires exist?”, we should be able to confidently and resolutely answer: no.

SOURCE

RELATED:

How Elizabeth Warren’s wealth tax would work
New York Times: The Rich Really Do Pay Lower Taxes Than You

 

Denounced in media, taxing the super-rich turns out to be popular with Canadians

Graffiti art depicting millionaire character from Monopoly game. Image: Sean Davis/Flickr

The Onion magazine once sardonically described the gap between rich and poor as the Eighth Wonder of the World — “a tremendous, millennia-old expanse that fills us with both wonder and humility… the most colossal and enduring of mankind’s creations.”

Another aspect of the rich-poor gap that fills me with wonder is the way the rich manage to keep it off the political agenda, although that may be changing.

Prominent U.S. Democratic presidential contenders Elizabeth Warren and Bernie Sanders are campaigning on taxing the super-rich, with Warren calling for a two per cent annual tax on wealth above $50 million, rising to three per cent on billionaires.

In Canada, where politicians have shied away from even putting their toe in the water when it comes to taxing the rich, NDP Leader Jagmeet Singh has taken a bold plunge, calling for a version of Warren’s tax — an annual one per cent tax on wealth over $20 million.

This is an excellent idea, and is apparently popular. A new Abacus poll shows that 67 per cent of Canadians support (or somewhat support) a wealth tax, along the lines proposed by Warren, and that even a majority of Conservative voters support it. That’s probably about the same percentage of Canadians who support (or somewhat support) Mother’s Day.

Yet the wealth tax has received little media coverage — beyond denunciations in the National Post, which surely has nothing to do with the fact the media is largely owned by billionaires.

One Post columnist posed the bizarre question: what is the problem to which creating a wealth tax is a solution?

Fortunately, the brilliant French economist Thomas Piketty answered that question at length in his celebrated international best-seller, Capital in the 21st Century, where he made the case for wealth taxes.

Without them, he argued with extensive data, wealth will become ever more concentrated, allowing the mega-rich to swallow up an ever-larger share of the world’s resources.

Given that 26 individuals now have as much wealth as the bottom half of humanity (3.8 billion people), one wonders at what point conservative commentators might consider this a problem. What if one individual had as much as the rest of humanity — or if she had all the world’s wealth? Would that cause alarm at the Post?

Let’s not forget that the super-rich typically made their fortunes by selling products built by employees we all paid to educate, and shipping those products on roads we all paid to build.

A wealth tax would redirect a tiny fraction of those fortunes back to the community to help ordinary Canadians. I’d call that a good solution to the problem of millions of Canadians working really hard but still struggling to get by.

A wealth tax would also help curb the enormous political power of the super-rich. Fossil fuel billionaires, for instance, have effectively managed to block global efforts against climate change.

Billionaires and their defenders maintain the super-rich would find ways to hide their money from tax authorities. But then why do billionaires resist such taxes? Because they know they would actually pay more — just as they did in the early postwar years, when taxes on the rich were much higher.

Piketty notes that Warren’s wealth tax is in line with historically high U.S. tax rates on the rich. He maintains those higher rates were key to the strong economic growth from 1940 to 1980 — before Republicans gutted taxes on the rich, slowing down growth and swelling family fortunes.

The Canadian tax system also helps perpetuate dynastic fortunes. Canada is the only G7 country without an inheritance tax.

According to a study by the Canadian Centre for Policy Alternatives, between 2012 and 2016, the net worth of Canada’s wealthiest 87 families grew by more than $800 million — per family.

The study also found that inheritance is growing in importance. Among the wealthiest Canadian families, 45 per cent had passed down wealth at least one generation in 1999, compared to 53 per cent in 2016.

So much for the argument that the super-rich are increasingly self-made entrepreneurs.

Turns out that Canada’s billionaires are mostly winners in what Warren Buffett calls the “ovarian lottery.” They just think they hit a triple. SOURCE

%d bloggers like this: