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Millionaires want the government to permanently raise taxes on them, but that would be bad for the economy

A group called of wealthy individuals called Patriotic millionaires has joined forces with other groups like Oxfam, Tax Justice, and many others, and is backing an ongoing project called “Millionaires for Humanity”. The project essentially boils down to a letter asking world governments to raise funds to pay for the costs of the coronavirus by permanently raising taxes on millionaires. The letter has been signed by a group of millionaires from the following countries: the US, the UK. Germany, New Zealand, Canada, and the Netherlands. Some part of the letter reads,

To our fellow global citizens, As Covid-19 strikes, the world, millionaires like us have a critical role to play in healing our world. No, we are not the ones caring for the sick in intensive care wards. We are not driving the ambulances that will bring the ill to hospitals. We are not restocking grocery store shelves or delivering food door to door. But we do have money, lots of it. Money that is desperately needed now and will continue to be needed in the years ahead, as our world recovers from this crisis.

Today, we, the undersigned millionaires, ask our governments to raise taxes on people like us. Immediately. Substantially. Permanently.

Additionally, according to the undersigned, millionaires do not have to worry about losing their jobs or livelihoods. So, taxing the rich is not only the right choice, but it is also the only choice that governments have in raising money to cover most of the costs brought about by the coronavirus pandemic.

Sounds noble and simple but the truth of tax is not quite so simple

If you are thinking “surely if taxing millionaires was such an easy way for the government to permanently increase their pool funds without negatively impacting the economy, every country on earth would be taxing rich people to no end”, you are right. While it sounds simple and noble on paper, the economics of taxing the rich are not quite so simple. The truth is, no matter how noble the intentions, the outcomes of taxing wealth have never been anywhere near positive. History is full of examples of how disruptive and even destructive wealth taxes are to the economy.

There are two main issues with a wealth tax (1) it is very distortionary and therefore anti-growth (2) it does not raise a significant extra amount of revenue. These two factors make a wealth tax very inappropriate as a way of raising revenue, even more so now. The economy is at a very critical juncture and does not need policies that would potentially permanently destroy the world`s productive capacity, and stunt economic recovery. A wealth tax would do just that.

1. The wealth tax is distortionary, and it discourages saving

In economics, taxes are optimal if they raise revenue without distorting economic incentives. Taxes distort incentives by encouraging tax avoidance or discouraging income/wealth-generating activity. While tax avoidance is a big issue, the real damage to the economy from increased taxes comes from the behavioral disincentives that taxes produce. Generally, the majority of studies on the effect of taxes on the economy agree that increasing taxes leads to reduced economic growth.

As illustrated by Cato, a wealth tax raises the cost of saving while making consumption cheaper. This reduces long-run investment in the economy. Discouraging saving does a lot of harm to the economy in the long run. It discourages entrepreneurship, innovation, and business formation all of which is the backbone of job creation and growth in the economy. The following is a good example.

In 2013, Thomas Piketty, in his best-selling book Capital in the Twenty-first Century, proposed a 1% tax on the net worth of $1.3million and $6.5 million and a 2% tax on net worth above $6.5million to remedy inequality. The Tax Foundation analyzed how this wealth tax would affect the economy. Their study, among other things, found that;

1) A wealth tax in the United States would reduce investment, wages, employment, incomes, and output.

2) Piketty’s basic tax would depress the capital stock by 13.3 percent, decrease wages by 4.2 percent, eliminate 886,400 jobs, and reduce GDP by 4.9 percent, or about $800 billion, all for a revenue gain of less than $20 billion.

3) The addition of a tax beginning at a net worth of about $260,000 would reduce capital formation by 16.5 percent, decrease wages by 5.2 percent, eliminate 1.1 million jobs, and reduce GDP by 6.1 percent (about $1 trillion annually in terms of today’s GDP), all for a revenue gain of only $62.6 billion.

2. Wealth-tax only produces modest revenue

But even with this kind of damage, wealth taxes do not produce significantly high levels of revenue. This is because the rich are like everyone else.  They are not extra noble, nor do they wholly desire to give their money endlessly to the government. The rich, like everyone else, respond to changes in costs and adjust their behavior accordingly.

So, when the rich are faced with a wealth tax they take efforts to shield themselves from the increased cost. They may take their business elsewhere, increase consumption, invest less, or invest in systems that help them avoid tax. The estate tax provides a good example of how people invest in efforts to avoid tax, significantly reducing tax revenue. To escape the estate tax, people have formed complex structures to avoid paying taxes. As a result, the collected tax is very small compared to the amount that would be collected if people did not practice avoidance.

“Estate tax revenue collected in 2017 from wealthy individuals who died in 2016 was only $20 billion. This is only about 0.13% of the $15 trillion net worth that the top 0.1% wealthiest families owned in 2016. This demonstrates quantitatively that the estate fails to take much of a bite on the wealthiest (in spite of a reasonably high 40% nominal tax rate above the $5 million exemption threshold, set to increase to $10 million in 2018). The main factor driving such low tax revenue is tax avoidance.”

Assuming that people would likely invest a similar level of effort in avoiding a wealth tax, which is not a far-fetched idea, it would too ambitious to hope that a wealth tax would raise enough revenue to cover all the costs coronavirus has imposed on the people and the economy.

Conclusion

The economy has suffered massive disruptions, and it is bound to stay contracted for some time. Instating a wealth tax, especially now, will deliver a major blow to the recovery of the economy. A wealth tax will discourage savings, investment, and business formation. This will create long-lasting damage to the economy

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