Wealth Taxes Misunderstand How Billionaires Benefit Society

4 min read

Support for wealth taxes continues to grow, despite the underlying economic misunderstandings that fuel the debate. The argument is often framed as a moral obligation for the ultra-rich to ‘pay back’ society for their success. However, this narrative overlooks the intricate dynamics of wealth creation and the broader societal benefits it generates. The push for wealth taxes, such as California’s Proposition 40, is rooted in the belief that billionaires owe a debt to the public for their wealth, which is seen as exacerbating inequality.

The Economic Misconception

Former International Monetary Fund chief economist Olivier Blanchard of France recently voiced concerns about the opposition to Proposition 40, a one-time 5% tax on the net worth of billionaires. He questioned why California’s wealthiest are spending heavily to defeat the measure, suggesting that billionaires ‘typically have not indicated that they are building their wealth to eventually make the world a better place.’ This perspective, however, misunderstands how fortunes are made in a market economy.

In a market economy, individuals do not build great wealth first and then redeem it later through good works. Instead, they create value by making the world better through innovation and efficiency. When someone purchases an $800 smartphone, they do so because they value the phone more than the alternative. The seller values the $800 more than the phone. Both parties walk away richer, with neither owing the other anything more. This exchange, repeated millions of times, leads to the creation of vast fortunes for those who innovate and provide value to society.

The Social Surplus Argument

As my colleague Arnold Kling explained, profits are earned within a positive-sum game for society. Profits incentivize firms to serve consumers and drive innovation. The drive for wealth taxes, however, operates on the opposite premise, viewing profits as something businesses take from the rest of us, as if we can take innovation and efficiency for granted. This zero-sum mindset is fundamentally flawed, as it fails to recognize the broader societal benefits of economic growth.

Nobel laureate and Yale University economist William Nordhaus estimated that innovators in the U.S. business sector personally captured, on average, a mere 2.2% of the social surplus they created between 1948 and 2001. The other 97.8% went to everyone else in the form of lower prices, higher wages, better products, and services that didn’t previously exist. In short, the world has already been compensated, many times over.

The Assumption of Government Use

Those urging billionaires to acquiesce also err by assuming the state that grabs the money will use it well to ‘make the world a better place.’ The burden of proof lies with them. California’s government already spends roughly $350 billion a year. What will the extra few billion accomplish that the rest hasn’t? As journalist and satirist P.J. O’Rourke once said, ‘Giving money and power to government is like giving whiskey and car keys to teenage boys.’ This metaphor highlights the risks of entrusting such power to the state, especially when the funds may not be used effectively.

Prop 40’s revenue is earmarked for health care, but money is fungible. In the end, California has one budget. Every earmarked dollar frees another for something else. Some billionaires might simply have concluded that their philanthropy does more good elsewhere, or that their dollars are more beneficial when invested in private enterprises. The tax also exacerbates California’s worst habit: spend, spend, spend, and then tax, tax, tax. The money is never enough to cover all the spending. A one-time levy spent over five years doesn’t fix that. It funds new commitments with temporary money. Some will want to make the tax permanent, which its intellectual architects clearly prefer and may have made possible. And yet that still won’t be enough.

The Moral Framework Concern

What worries me most is the moral framework. When a society convinces itself that the people making life better and less costly are the problem, we eventually stop getting those people. Contrary to Blanchard’s naive belief, billionaires aren’t lacking in public spirit. Even if we ignore their often massive charitable giving, we can’t forget that the market already collected their contribution and handed a large share of it to the rest of us. We should stop demanding they apologize for the other two cents.

The push for wealth taxes not only misunderstands the economic mechanisms of wealth creation but also risks undermining the very innovation and efficiency that drive societal progress. It is crucial to recognize that the market, not the state, is the primary engine of economic growth and that the benefits of this growth are shared broadly. The moral and economic case for wealth taxes is weak, as it fails to account for the complex and mutually beneficial nature of economic activity in a free market.

Source: PJ Media

Written by

Connor Davis