Ahead of the Curve: Time for a Wealth Tax
Two weeks ago I wrote favorably about Senator Elizabeth Warren’s plan to expand antitrust enforcement against the tech industry. Today I comment, again favorably, on her proposal for new taxes on the wealth (not just the income) of people she calls “ultra-millionaires.” She proposes a 2 percent annual tax on the net assets of any household worth over $50 million, and a 3 percent tax on those worth over $1 billion.
Just to be clear, this is not an endorsement of Warren as a presidential candidate, but a commentary on issues she prioritizes. Her wealth tax idea is a good one, and should be taken seriously regardless of what happens in this campaign.
The rich are getting proportionally richer at an extraordinary rate. Thomas Piketty presented the evidence for this in mind-numbing detail in his 2014 book, Capital in the Twenty-first Century. The richest 130,000 families in the United States already hold nearly as much wealth as the bottom 117 million families combined. Nothing has happened since then to slow this trend; the 2017 tax bill will almost certainly accelerate it.
“Futurologists” focus largely on what the coming technological change in genetics, materials science, space travel, etc. will mean for humanity. The new hardware is important, but the fact that nearly all of it will be owned by a handful of people must be considered as well.
The sharp increase in the concentration of wealth is no surprise for anyone familiar with the ideas of the late economist Louis Kelso. The non-human factor of production, which Kelso called “capital,” contributes an ever-increasing proportion of the goods and services people use. Labor, the human factor, produces less and less. Scientists and engineers around the globe have been pushing capital forces in this direction for decades, and they’re good at what they do. Their success has become ever more pronounced with the ubiquity of computers in the economy. As we start to feel the effects of artificial intelligence, robotics, and quantum computing, the scales will tip even further.
Who owns the machines that hold an ever-increasing share of the work of production? A relative handful of people. Why? Because the capital finance system is rigged in their favor. Capital pays for itself. Those who are already wealthy use this fact to grow ever wealthier by obtaining the credit to acquire capital that will, first, pay its own cost of acquisition, then continue producing income to make the rich ever richer. They rest of us are effectively frozen out of this positive feedback loop. That’s how Piketty’s numbers got to be the way they are.
Kelso found this cycle immoral, in the strict sense of the word. He posited a humanist system of economic morality, a key principle of which was that the purpose of production is consumption—not bragging rights. It is morally wrong, according to Kelso, to produce more than you can consume, because doing so is “beggaring your neighbor.”
That’s where the wealth tax—which Kelso also advocated—comes in. Billionaires cannot possibly consume all that their capital produces. By hogging ownership of wealth-producing capital, under our antiquated capital finance system, they bar millions of other deserving people from access to the “capital pays for itself” magic.
There are problems with the Warren proposal. It may not be constitutional. The Sixteenth Amendment allows Congress to tax income, but not wealth. More importantly, it will almost certainly not raise the trillions of dollars Warren projects. It will take years before tax regulators are able to close the various loopholes and evasions that the armies of lawyers and accountants employed by the ultra-wealthy will unquestionably develop. Moreover, if the law ever does gain teeth, billionaires may simply move their wealth out of the US, notwithstanding Warren’s constitutionally doubtful proposal for an “exit tax.” Other countries, such as France, have scrapped their wealth taxes for precisely these reasons. It is irresponsible for Warren to be making outlandish promises about spectacular new government entitlement programs to be funded by new revenues that may or may not materialize. Whatever money does get raised would best be applied to shrinking the staggering debt burden this generation has already dumped onto our grandchildren, for which she, as a senator, is partly responsible.
Funding new programs is not the reason to impose a wealth tax, and the risk of driving billionaires offshore is not a valid reason to oppose it. We should have a wealth tax simply because it is moral—it’s the right thing to do.
Suppose you and I are the sole inhabitants of a small island, living off its produce. By inheritance, hard work, or dumb luck I happen to own 95 percent of it, producing far more nuts and berries than I can ever eat. You’re stuck on the remaining 5 percent, barely scraping by, often going hungry. That social structure is just wrong, and does neither of us any good. Producing, through capital ownership, more than one wants to consume has no place in any sane system of morality. A tax on extreme wealth, even if we’re the only country that implements it, is a step in the right direction. It’s far from sufficient—what we really need are politicians talking about the rest of Kelso’s program, to re-rig the rules of capital finance to build more ownership of the future into the hands of ordinary people. But a step is a step.