Elizabeth Warren's wealth tax

Great Debates
141

Thank you. Probably the most significant recent example in the U.S. is Furman v. Georgia (1972) where SCOTUS essentially (and only barely, with a 5-4 vote) decided the death penalty as it then existed violated the 8th Amendment. Very rapidly, state legislatures who wanted to keep using the death penalty rewrote their legal standards for doing so to conform to the SCOTUS ruling. Anyone who was on death row in 1972, though, got their sentences automatically commuted to life imprisonment. Some are still alive in prison even now. A few have been paroled.

I though this had been the case for Charles Manson and Sirhan Sirhan, but they were spared when California’s Supreme Court ruled in People v. Anderson (1972) that the state’s death penalty violated the state’s constitution, a few months before SCOTUS decided Furman and made it nationwide.

The death penalty was effectively gone from the U.S. until SCOTUS ruled in Gregg v. Georgia, Proffitt v. Florida, Jurek v. Texas, Woodson v. North Carolina, and Roberts v. Louisiana (1976) that these states had managed to find legal formulations for the death penalty that did not run afoul of the 8th Amendment and convict season was open again.

142

So, are stock holdings considered wealth? Many of the richest people have the bulk of their money in stocks.

Let’s take Elon Musk. He invested every nickel he had in SpaceX, to the point where he was living in a small apartment. And after the last Falcon 1 explosion, he was down to his last money and if another one had exploded it would have sunk the company. Musk holds something like 51-60% of SpaceX stock.

So let’s look at the way a wealth tax would have affected him. First, when he sold PayPal he got 165 million. That was his seed capital for SpaceX and Tesla. The government takes $3.3 million of that every year while he tries to find another place to use it.

So then he comes up with SpaceX, and puts all his money into it. Let’s say that investment doesn’t pay off for ten years. So he would have to cough up about 20% of that money to the government before he ever makes a profit. The same is true for every investor in big projects: Their wealth doesn’t vanish just because it’s invested, so they have to figure that they will lose a good chunk of their money in taxes while the business is building towards profitability. And then there’s risk: Most new ventures fail. I don’t suppose the government is going to give their tax money back if the venture fails? I invest a billion dollars, my company is valued at a billion dollars for a few years, then goes belly up before it ever makes a profit. So now I don’t just lose my billion, but I lose another $200 million in wealth taxes over the period my company was struggling to succeed.

Except it gets much worse, because long before these companies generate a profit they can be valued much higher.

SpaceX is currently valued at around $30 billion. 1% of SpaceX stock is therefore worth maybe 300 million.

Musk is worth about $21 billion today. I’m guessing that less than few hundred million are in liquid assets - most of it is locked up in the stock of his companies. But according to Elizabeth Warren, Musk would have to cough up $400 million per year for the privilege of holding that stock. So the founder of SpaceX would have to liquidate 1.5% of his company every year, and would therefore lose control of it in a few years.

Going back to our poor billionaire - imagine if his company, like other silicon valley companies, gained a huge valuation then collapsed before ever turning a profit.

Imagine you start a company by selling your house. You put $500,000 in. Then your company gets some venture capital, some viral marketing, and suddenly you are Pets.com. Your company is worth $10 billion, and you hold half the stocks. Suddenly you are on the hook for $100 million per year in taxes, even though you are living in an apartment, sold your house, and your company is still not turning a profit. Then five years later yiur company crashes to zero. Now you didn’t just lose your investment - you lost $500 million dollars in wealth tax for ‘wealth’ you never got to see.

But it gets worse, because venture capitalists also have to pay the tax. This would heavily damage the ability to raise venture capital, and it would also bias investment heavily towards short-term returns. If I invest a billion dollars in a new energy source fhat won’t be online for 10 years and won’t turn a profit for twenty years, I still have the ‘wealth’, but now before it ever works for me it’s going to be depleted by 20-40% in wealth taxes. My standards for what I will invest in just went WAY up, and I will bias my investments towards things that have a fast return. That’s the only way I can survive as an invstor in a world with wealth taxes,

So Warren’s plan will destroy investment, cause capital to flee, and distort private economic planning, with tax avoidance being a large part of decision-making rather than what’s best for the company or the country.

And in the end, she won’t collect anywhere near the amount of tax she’s claiming, because of tax avoidance, capital flight, and a general slowdown of the economy as its lifeblood is taxed out of it. Companies like SpaceX and Tesla probably wouldn’t even exist, as both were high-risk, ling-term plays made possible only because a billionaire was willing to fund it. Start taxing away private aggregations of wealth, and you cripple the ability of the private market to engage in large long-term projects or take big risks.

All of these are why almost every country fhat has tried a wealth tax has abandoned it. It’s also similar to the failure of the ‘luxury’ tax.

143

I’m not very convinced by that argument Sam.

There’s already a liquidity premium that means that the required rate of return for long-term investments is higher than for short term ones. Wealth taxes would increase that premium, but simply pointing that out isn’t a sufficient argument to say that it’s bad. Taxes are always a drag on economic efficiency. But that doesn’t mean we should have no taxes, it means we should carefully consider the pros and cons of each.

Letting the ultra-wealthy continue to amass wealth and the political power that comes with it is more efficient from a micro view, but it has major societal downsides. It may be worth some economic inefficiency to alleviate those downsides.

Someone who starts a company that makes them a multi-billionaire will be forced to sell some of their shares to pay taxes. They might even have to give up individual control of their company. But there are plenty of ways to extract enough money to pay taxes from a (perhaps temporarily) $10B company without leaving the founder holding the bag if it craters. Ask anyone who’s a shareholder in an S-corp; they somehow always manage to be paid out exactly enough in earnings to cover their taxes each year.

The “high taxes will destroy investment and innovation” argument would be more convincing if most of the examples you gave and that readily come to mind weren’t started and headquartered in California and New York, two of the highest tax states. If high taxes were really that disastrous to economic innovation, how come Google and Facebook and Tesla weren’t founded in Nevada or South Dakota? Which, again, isn’t to say that taxes have no effect on investment. People respond to incentives. But you need to do more to show that a particular tax would be catastrophic. Because relatively high tax states seem to do ok so far. Which suggests that there’s some room to increase taxation without all the billionaires heading for the hills.

I do think that there are better ways to increase tax incidence on the rich than a wealth tax, but I also don’t think that a wealth tax would be quite as disastrous as you claim.

144

I’m a bleeding heart leftist who hates Trump and likes Warren and wants her to be POTUS. I’m also a lawyer. The proposal is very clearly unconstitutional.

145

From a paper (66-page PDF warning) by the economists behind Sen Warren’s proposal, “If the primary goal of the wealth tax is to correct the regressivity at the very top (due to low income realization relative to true economic income), the wealth tax could be set as a minimum income tax that kicks in only when the wealth tax is larger than the income tax. Colombia has had such a system where the income tax is based on the maximum of reported income and presumptive income defined as 3% of wealth (Londono-Velez and Avila, 2019). The advantage of this system is that such a wealth tax would clearly be constitutional.”

Anyone see any flaw in that idea?

146

Yeah, It has the same problem I already mentioned: It would harm capital growth and investment, and lead to tax avoidance and capital flight, making the economy weaker.

It’s also based on the notion that government is a better steward of capital than are the people who earned it in the first place, and that government ‘investment’ can substitute for private investment without affecting the dynamism of the economy. Socialists may believe that, but they are tragically wrong.

147

nm

148

I don’t believe that the government is generally a better steward of capital, but I’m still in favor of higher taxes on the rich.

Because increasing inequality leads to massive power imbalances and social and political dysfunction. I don’t think that makes me a socialist.

149

That’s exactly what a crypto-socialist would say.
Welcome to the antechamber of the Revolution, comrade !

150

I’m glad the argument has shifted from “How could we possibly put a price tag on assets in order to know their taxable value?” to “rich people shouldn’t pay taxes.”

That Rembrandt in the bank vault that was mentioned earlier is much better stewardship than a school or the interstate highway system.

151

This is just an indictment of income/wealth/gains taxes, not of any particular tax scheme. It’s not going to fly when these taxes, in various forms, have been around for decades and decades, coinciding with lots and lots of economic growth.

And tying that to socialism? Ludicrous. If that’s socialism, than I guess the US has been socialist for many decades, with lots of economic success.

152
  1. Let’s assume that government IS a better arbiter of capital than the private sector.
  2. And also assume that a wealth tax would be Constitutional.

Would that then mean that the government could turn around and offer high yield bonds? You know, like the private sector can (and does)?

If 1 is true, why don’t they offer them now? Seems to me, if they did it would garner them all the capital they could need for spending NOW.

153

I don’t know, and I don’t know what this has to do with my post. If you think something in my post was wrong, please point out specifically which part, and I’d be happy to respond.

154

Well taxing wealth is very likely to be unconstitutional (which kind of trashes the idea that the taxes would be around for decades eh?)

The other part wasn’t about an assertion you made but I thought it went to the heart of what you thought, the government being a better holder of capital than the private sector (Since you took offense to the Socialist comparison)

155

The comment I was criticizing was about taxes dissuading work and investment, which would apply equally to income taxes, which have of course been around for decades.

I think this is too simplistic. In some circumstances, the government might be. In others, the private sector.

156

It wouldn’t be the holder anyway in this situation. The question is is it better to have a private holder of capital or a marginal dollar of debt that is close to 100% of a country’s GDP? Historically the latter has been a recipe for disaster no matter the history of the other side of the equation.

157

I’ll respond directly: No, that doesn’t follow.

Because even if we believe that government is a better steward of capital, government is generally not set up to capture the surplus of that economic benefit. In fact, the whole point of having government collect taxes is that the government will spend on public goods: projects with broad improvements to the general lives of the populace that are hard to capture and privatize.

158

So, was watching a video about wealth taxes in South Korea. I won’t link to the video unless someone really wants to watch it. The gist, though, is an example they are using from Samsung. I guess in South Korea they have a 65% tax that kicks in on inheritance, so the current Samsung president’s actual existential status is currently unclear…i.e., no one knows if he’s alive or dead. They are doing this because the wealth tax in South Korea includes, well, all wealth. That means a substantial portion is locked up, as in the case of most billionaires, in stock. Because people know that this tax is going to go into effect, the price of Samsung stock has gone up in anticipation of a large part of the current CEO’s death and his heir having to sell it off to pay the tax. It sets up all sorts of issues and people basically gaming the system, and has set up this seemingly loopy thing where they are keeping the fact of whether this guy is alive or dead a secret until and unless the heir and the board of Samsung get some promises from the South Korean government that this could be paid off over time, instead of all at once.

It’s the kind of situation you get into when you start talking about wealth taxes of the very rich, since ‘wealth’ is generally not in piles of money or vats full of gold coins, but instead is in a variable media such as stocks. If you are going to tax that over time, instead of one large hit at the end like South Korea does, you would have to constantly be having to figure out what it’s worth…and even doing so and then forcing the person to sell some of it to pay the taxes can change the equation, and also allow others to game the system (i.e. you know Bill Gates is going to have to sell some of his stock to pay the tax, and you know when, so…).

I get what Warren is trying to do (and why…it’s a naked play to her base, obviously, and plays well with the faithful), but I don’t know if such a system is really workable, or what the unintended consequences would be. Obviously, this would only be something that would affect the very rich…but, honestly, after you go through all of this convoluted horseshit, my WAG is we wouldn’t even get that much in new taxes out of it, not to offset the losses in just the areas I can see…and I’m about as far from an expert on this stuff as you can get.

159

It wouldn’t only affect the very rich, because the wealth-destroying nature of the tax would affect jobs and investment, and we would all be poorer.

160

Wait…what? You clearly have not been reading the thread. Investments in equity stocks does not create jobs. Consumers create jobs. It’s a closed loop system.

:rolleyes: