Why a Wealth Tax Is a Bad Idea

Billionaires are better at figuring out what to do with their money than the government will ever be.

The president's budget is the lawmaking equivalent of a vision board or a mission statement: a moderately delusional wish list that is intended to provide motivation. The president's budget is never legally binding—Congress still retains some tenuous grip on the purse strings—but it is always instructive.

President Joe Biden has long been, in the immortal words of Editor at Large Matt Welch, a rusty weather vane, creaking reluctantly in the direction that the winds of his party blow. With his new budget proposal, the breezes have finally brought us to the shores of a serious wealth tax debate.

Biden isn't calling his proposal a wealth tax, of course. It's the "Billionaire Minimum Income Tax," and it imposes a minimum 20 percent tax on the income of households with more than—oddly—$100 million in wealth. Biden's proposal is smaller and more pragmatic than the earlier variants from Sens. Bernie Sanders (I–Vt.) and Elizabeth Warren (D–Mass.)—par for the course with Biden. Most notable is that even with implausibly optimistic estimates of the federal government's ability to collect, the whole mess is supposed to raise an average of a mere $36 billion per year over the next 10 years.

The University of California, Berkeley, economist and Warren adviser Gabriel Zucman estimated what several billionaires would pay under the plan's 20 percent tax on unrealized gains in illiquid assets, pinning Jeff Bezos' bill at $35 billion, Warren Buffett's at $26 billion, and Jim Walton's at $7 billion.

Anyone who has been paying the slightest bit of attention to federal spending over the last several years knows that figures that begin with b instead of t are now considered rounding errors. The point of this wealth tax is not to raise revenue. It has two rather different aims.

The first is pure political calculus. A floundering, unpopular president seeks to demonstrate a willingness to punish a small, unpopular class of people. A Reuters/Ipsos poll last year found that nearly two-thirds of respondents agree that the very rich should pay more taxes: 64 percent either strongly or somewhat agreed that "the very rich should contribute an extra share of their total wealth each year to support public programs."

In attacking Sen. Joe Manchin (D–W. Va.), who continues to stand athwart the Democratic Party's worst ideas vaguely muttering "stop," The New Yorker described agglomerations of wealth as "unsightly," which captures the spirit of the thing quite nicely. There are many things the federal government could do if it wanted fewer wealthy people, but none would be so satisfying as simply making a point of taking more each year from the edible rich.

The second aim, which has more far-reaching consequences, is to establish the principle that the U.S. government can tax based on wealth at all. If such a tax were to be put into law—and found constitutional by the Supreme Court, which would be no mean feat—it would be the thin end of a very large wedge. Biden's proposal will spin up the huge bureaucratic, legal, and accounting support systems, public and private, necessary to support the formal tracking of wealth alongside income.

The utility of permitting individuals to accumulate large amounts of money varies from person to person, of course. There are many billionaires whose fortunes are extractive or confiscatory—that is, they have seized a larger slice of an unchanged pie. But in the U.S. in particular, we specialize in billionaires whose fortunes are clearly related to value creation—that is, they have taken a healthy slice of a pie that they also made much larger.

Sanders and others seem determined to conflate these two groups, applying the term oligarchs to, among others, people whose houses have an excessive number of bathrooms, people who build rockets, and people who own Major League Baseball teams.

People do not need to have been wholly self-made to somehow deserve to keep their money. No billionaire is an island, even if many of them own one. In fact, vanishingly few of us have fates that are wholly self-determined.

As a moral matter, if not a legal one, we might ask what the very rich do with their money as a way of evaluating whether they should keep it. As famously rich person Elon Musk recently tweeted: "Working hard to make useful products & services for your fellow humans is deeply morally good." Many who support wealth taxes seem to hold the belief that the government would use the resources that the very wealthy command toward more valuable ends. Of course, most of the fortunes of billionaires such as the Waltons, or Musk, or Bezos are tied up in the large and extremely productive firms that made them rich in the first place.

A dollar knocking around the Walmart balance sheet is almost certainly doing more good than that same dollar in the hands of the U.S. Treasury. Walmart sells goods and services people value and voluntarily purchase, as well as providing income to millions of people around the world, and offers health insurance coverage to nearly a million of its workers. Perhaps you don't think Walmart does those things at the quantity and quality you would prefer—but then again, neither does the U.S. government. And Walmart incarcerates no one, wages no wars, and incurs no debt that must be paid by future generations.

Very rich people also tend to give to charitable causes. You might object that they donate frivolously to the opera, give to already well-endowed universities, or otherwise participate in philanthropy with limited public benefit, perhaps in pursuit of status or invitations to fancy parties. The federal government has been known to do the very same; recall that some pandemic relief money went to Washington, D.C.'s Kennedy Center for the Performing Arts, for instance, and that the federal government poured $148 billion into higher education in 2018.

But with their discretionary dollars, the very wealthy are more likely to give to charities that focus on minimizing suffering internationally, where a dollar goes much further, than the federal government ever will. On a dollar-for-dollar basis, it's awfully hard to argue that the federal government would do more net good with $11 billion more of Bill Gates' money than he will himself, given his record.

Sen. Ron Wyden (D–Ore.), who has shown a higher-than-average literacy on matters of technology policy, unfortunately backed the plan and immediately allowed himself to be goaded by Musk, who polled Twitter on whether to realize some of his unrealized gains by selling 10 percent of his Tesla stock as a response to the proposal. "Whether or not the world's wealthiest man pays any taxes at all shouldn't depend on the results of a Twitter poll," Wyden sniffed. But that amount may well end up being determined by presidential popularity polls, which is hardly a perfect mechanism.

Every country on the planet with high real median personal income also has billionaires. It is at least plausible that there is a connection between institutions that make billionaires possible and the same ones that create general prosperity. In fact, Sweden has more billionaires per capita than the United States. Perhaps not coincidentally, Sweden is just one of dozens of countries that have tried wealth taxes and abandoned them.