Millionaires want higher taxes, but that would be bad for the economy
A group of wealthy individuals, called Patriotic Millionaires, is asking world governments to raise taxes on Millionaires to pay for costs associated with the coronavirus pandemic. Patriotic Millionaires, which has joined forces with Oxfam, Tax Justice, and many other groups, has made the proposal through a written letter. So far, the letter has been signed by several millionaires from the U.S., 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.
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 is also the only choice. This, however, is a flawed way of thinking.
High taxes are harmful to the economy
If indeed taxing millionaires was an easy and sure way for the government to raise revenue without any negative side effects, every country on earth would be taxing rich people to no end.
However, while it sounds noble on paper, the economics of taxes, especially those on the rich, are not quite so simple. However noble intentions might be, tax hikes (on everyone) bring disruptive and even destructive results. Wealth taxes — a big part of the Patriotic Millionaires’ platform — are even particularly problematic.
High taxes are distortionary
Generally, tax rates are considered optimal if they raise revenue without disproportionately distorting economic incentives. While taxes at every level can be distortionary, higher tax rates are much more distortionary than low tax rates.
This is because when taxes are high, it becomes beneficial for people to hide or underreport their earned income — tax evasion — or exhaust legal loopholes to reduce their tax burden — tax avoidance. But even more importantly, high tax rates discourage people from undertaking productive economic activity — such as work and investment. This is especially true when the tax system is highly progressive.
A research paper from the Tax Foundation, for instance, summarized several research papers looking at the impact of taxes on growth. The paper, which was published in 2012, looked at 26 studies, of which all but three found a negative impact of taxes on growth.
As illustrated by Cato, a wealth tax is particularly concerning because it raises the cost of saving while making consumption cheaper. This reduces long-run investment in the economy, which in turn discourages entrepreneurship, innovation, and business formation, stifling growth.
Wealth taxes do not significantly raise revenue
Even worse, even with the kind of damage that wealth taxes impose on the economy, evidence indicates that they do not produce significantly high levels of revenue. This is because the rich, like everyone else, respond to changes in taxes by adjusting their behavior accordingly. In France, for instance, high-income earners reacted to a wealth tax by leaving the country.
The closest thing to a wealth tax in the US — the estate tax — has also had quite similarly disappointing results. According to Cato, to escape the wealth 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 if it was created in the US and other countries, it’s too ambitious to hope that raising taxes on the wealthy would raise enough money to cover the costs associated with the pandemic.
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 economic recovery.
A wealth tax, and other tax hikes, will discourage savings, investment, and business formation. This will create long-lasting damage to the economy potentially without raising the expected revenue.