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If you are someone like me, you probably did not have a strong reaction to Jeff Bezos using his own money to go to space. However, for our politicians, the reaction was different. For example, Business Insider reported,
Sen. Elizabeth Warren tweeted Sunday about Jeff Bezos’ recent spaceflight, saying that if he could afford to go to space, he could afford to pay more in taxes.
“The richest guy on Earth can launch himself into space while over half the country lives paycheck to paycheck, nearly 43 million are saddled with student debt, and child care costs force millions out of work,” Warren tweeted. “He can afford to pitch in so everyone else gets a chance.”
Elizabeth Warren is not the only person to have had this type of reaction. In fact, numerous other groups and individuals, including Bernie Sanders, also expressed similar sentiments.
So what is the outrage about? In June of this year, ProPublica obtained IRS data showing that most billionaires have paid zero federal income in some years in the past. According to the report, even though Jeff Bezos’s wealth grew by $99 billion between 2014 and 2018, he only paid $973 million in federal income tax, an effective tax rate of 0.98 percent.
The U.S. government, of course, does not levy taxes on wealth, but on taxable reported income, so the use of wealth to represent taxable income by ProPublica is problematic. If the U.S. government did impose a wealth tax, most people would have to pay taxes if their house or stock went up in value.
The federal government, of course, taxes capital gains, which are profits made from selling assets like houses and stocks. But again, these gains have to be realized for the federal government to tax them. So, to say the least, Jeff Bezos’ true tax rate — if considered on the basis of actual taxable income — is potentially different from the one presented here.
Taxing billionaires more wouldn’t solve our problems
The tax system is, of course, complicated. Provisions included in the tax code, like credits and deductions, for example, are meant to reduce tax burdens for most people, including billionaires. But imagine that politicians got their way and were able to impose ultra-high rates of taxes on billionaires. Would that solve all our problems? i.e., poverty, college debt, lack of affordable childcare, expensive health care, and everything else you can think of. Highly unlikely.
We first need to understand that most billionaires have made their wealth by providing goods and services that people value and pay for. These goods and services have provided tremendous benefits to numerous people. So a tax on wealth would most likely be a tax on innovation, effectively discouraging investment and risk-taking, consequently reducing economic growth.
An Ultra-Millionaire Tax whereby Jeff Bezos would pay about $5 billion a year, for example, would mean he would have to liquidate stocks and sell some assets in order to match that requirement. But what would Amazon be worth if its founder has to do this every year? Probably not much.
And if all billionaires are in the same boat, rest assured there is less and less wealth for the government to take from them each year, until it all goes away. And it is less likely that anyone would want to invest their time and money into making a profitable good or service when they know the government will confiscate their wealth at some point. Before you know it, the government’s source of revenue will be drying up.
This is even assuming that these special “tax the rich schemes” work at all. Evidence shows that where they have been enacted, taxing the rich has failed to bring in estimated revenues. “Maryland created a special “tax on the rich” that legislators said would bring in $106 million. Instead, the state lost $257 million,” according to a 2012 Forbes piece. Countries in Europe have abandoned such wealth taxes after they became such a flop.
But even in a best-case scenario where projected revenues are actually collected from taxing the rich, research shows that revenues would unlikely be enough to cover huge government spending programs.
A study by the Manhattan Institute found that under a realistic scenario, extra revenue from higher taxes on the rich would only be $3.9 trillion in a decade. And even under the rosiest scenario where a wealthy tax, as well as all income tax hikes, bring in all estimated revenue, the federal government would only collect $9.3 trillion in a decade, or less than $1 trillion extra a year.
To put that in perspective, the federal government spent $6.5 trillion in 2020 and only collected $3.42 trillion in revenue, a deficit of $3.08 trillion. In 2021, the federal government is projected to spend $6.8 trillion while collecting $3.8 trillion, a deficit of $3 trillion. If spending and revenue in 2022 were to remain at similar levels as 2020 and 2021, a $9.3 trillion extra would only be able to cover deficits for three years.
Whether billionaires should spend their incomes differently is an entirely philosophical question for the most, and will potentially depend on how you feel about immense wealth. Research evidence, however, does not support the idea that taxing rich people more would solve our problems.