Liberals often decry the decline of “expertise” and Republicans’ failure to consult “experts” on war, the economy, or health policy. It’s hard to take this criticism seriously after reading Bernie Sanders and Ro Khanna’s latest tax proposal, which would be roundly rejected by most people who know anything about economics.
On Monday, Sanders and Khanna introduced the “Make Billionaires Pay Their Fair Share Act.” The bill would impose a 5 percent tax on billionaires’ wealth each year and use revenues to expand entitlements beyond a left-leaning European’s wildest fantasies. It instructs Washington to cut a $3,000 check to every person in a household earning $150,000 or less; restore pandemic-era Affordable Care Act subsidies; add vision and dental coverage to Medicare; “[e]nsure no family pays more than 7% of their income on childcare”; rehabilitate homes to “end homelessness”; and more.
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Even if the math added up, the plan does not. All taxes are distortionary, meaning they cause people to change their behavior, sometimes causing waste and lower growth. But that’s truer of some taxes than others. Wealth taxes are generally most distortionary, followed by income taxes, with consumption taxes posing the least harm.
Wealth taxes are also hard to enforce. Many assets are not publicly traded and so are hard to appraise. These taxes also encourage people to keep their wealth in things that are hard to value, like contemporary art, instead of investing in more productive ventures, like new companies.
Every country with wealth taxes has failed to raise much revenue from them. But those nations still suffered the consequences of having imposed the taxes, including the wealthy fleeing the country or entrepreneurs selling companies early to cover their tax bills. Compare the entrepreneurial climate in Norway (which has a wealth tax) and Sweden (which doesn’t): since Norway hiked its wealth-tax rate, 105 of its 400 richest residents have left the country.
Europe’s wealth-tax rates are relatively low, usually around 1 percent. The Sanders-Khanna plan’s proposed rate (5 percent) is much more aggressive. Annual asset returns are often about 5 percent, meaning their proposal could amount to a 100 percent capital-gains tax—and even higher in bad years. This particular incarnation of a wealth tax is expected to be exceptionally harmful because it kicks fully in at the $1 billion level, rather than gradually, creating an incentive to keep wealth below exactly $1 billion. If Sanders and Khanna want to eliminate billionaires, their plan could do it, either by encouraging those billionaires to leave the United States or by reducing their asset holdings, at least on paper.
We can’t even pay for the entitlement state we have, let alone the one Sanders and Khanna have proposed. But their plan may be about more than redistribution. Many on the Left, and even some on the center-Left, resent the wealthy and think they have too much power.
Even taking this view at face value, the wealth tax is a way to accumulate power. If you think Elon Musk has too much power, handing his wealth to government bureaucrats only transfers that power from one source to another. And Musk, unlike the government, has proven a mostly competent investor.
The Sanders-Khanna plan would take money from capital markets (where Musk invests), and fund consumption among the poor, middle, and upper-middle class. An economy can’t grow on consumption alone; we need investment in risky ventures (like those that Musk makes) to fund innovation and ensure future growth.
Radical proposals shift the range of permissible opinion. Wealth taxes have long been considered ineffective and economically damaging. Few serious people, other than a few French leftist economists (who reviewed the Sanders-Khanna plan), take them seriously.
The Make Billionaires Pay Their Fair Share Act aims to make wealth taxes part of the Democrats’ standard economics toolkit. In time, moderately high taxes may start to sound acceptable—or even like a reasonable compromise.
Photo by Jason Armond / Los Angeles Times via Getty Images)