A standard economic precept is that we don't want to tax wealth at all. Not in a free market society we don't, at least. A standard political insistence is that we must tax wealth.
That first, don't tax wealth, is because -- in a free market society -- the only way anyone can become wealthy is by organizing, or producing, something that other people value. It's necessary to start an activity -- we can call it a company if we want -- which makes a profit in order to become rich. The profit is, by definition, the value consumers put on the output over and above the costs of the inputs being used to do something else.
So, for the company to make a profit, the output must be more valuable than the input, this process by definition creates value. Consumers must agree, because we're in a free market here, everyone can buy, or not buy, the product as they wish. So consumers must think that whatever it is is worth more than what they pay for it. By definition.
So, the only way to gain that pile of value, that wealth, is by producing value that others enjoy too. It's this which drives the results of the paper “Schumpeterian Profits in the American Economy” by the Nobel Laureate, William Nordhaus. The finding is that the entrepreneurs, the people who set up the company and drive it to success, get to keep about 3% of the total value created. Nearly all of the other 97% goes to us, consumers, in value that we get but don't, in fact, have to pay for.
Sure, Jeff Bezos has however many hundreds of billions of dollars. But Amazon has also lowered inflation across the entire American economy by some 2% over the years. That's 2% off the cost of everything in a $22 trillion economy. That's money off every single year too. The benefits to us are vastly larger than those to Bezos.
The reason we don't tax wealth is because we'd like to encourage other people to do the same for us. Make us richer and they get to keep 3% or so of the gain. That's probably the best bargain in all of history.
But that's economics and rationality. Politics doesn't work that way. So, the insistence is that those rich folks, they've got to be made to pay. The latest proposal in America being the “Billionaire Minimum Income Tax.” When Amazon shares go up Jeff Bezos “makes” more money. He only pays tax if he sells those shares though. So, the idea is to tax Bezos when Amazon shares go up -- whether he sells them or not.
That is, folk should pay tax on unrealized capital gains instead of waiting until they've actually got the cash in their hands. This is an extraordinarily bad idea of course, because it means that no one can grow a company, they have to keep selling shares every year to pay that tax bill.
But it's worse than that. It's entirely stupid. Because there's this new potential law that states “if the value of their assets falls, they will be due a credit or refund from their minimum tax payments” So, when stock markets go up, those billionaires pay lots of tax. But what about when stock markets go down? Like, say, this year “... the combined net worth of the eight tech billionaires in the top 20 plunged by $256 billion.”
The tax is supposed to be at 20% of those unrealized gains. There's a refund if people lose money. So, here in 2022 the effect of this tax would be to send $50bn -- that's 20%, near enough, of the $256bn -- in cheques for tax refunds to eight of the richest people on the planet.
Jeff Bezos lost $50bn and changed this year on the fall in Amazon shares. That means, at that 20% rate, a $10bn tax refund. The point here is not to just point out the silliness of this specific proposed law. It's to point out that politics -- as opposed to good economic thinking -- leads to proposals of the most ineffable stupidity.
Here the proposal is that we should send a $10bn tax refund cheque to the world's second richest man. All in the name of taxing the rich more. Oh, and another $10bn cheque to the world's richest man, Elon Musk. In order to tax the rich more.
It's true that economics sometimes gets things wrong, sure. But we have to employ politics to find the truly loopy ones. For this proposal, this billionaires' tax is being seriously discussed. Rather than just being laughed out of public life as the idiocy it so obviously is.
Seriously, we tax the rich more by sending them refund cheques? This is then being taken seriously, actually proposed to Congress? What more proof do we need that politics isn't the right way to be doing things?