The Wealth Tax and the Neo-Socialist Deception

Today’s Democrat Party, as highlighted by the 2020 presidential hopefuls, such as Senators Bernie Sanders and Elizabeth Warren, as well as cronies like Alexandria Ocasio-Cortez  have been waging a neosocialist crusade to cripple the capitalist or free market system. Their obsession is the pursuit of greater equity, expressed primarily through punitive leveling, is noting else than inequality, such as income or profit or wealth, are considered public harms that need to be controlled—by taxes, regulation, and other government policies—not to be paralleled to President Franklin D. Roosevelt’s New Deal which sought to create infrastructure for farmers and blue collar workers, in addition to taking care of the elderly with Social Security.

We all know that capitalism has strengths and weaknesses, and critiques of it are familiar—they have circulated widely ever since market-based economic systems started gaining ground in the eighteenth century. The force of those critiques, in fact, has helped fuel repeated reform movements over the ages, which have collectively transformed nineteenth-century laissez-faire into the mixed welfare state economies of contemporary advanced industrial democracies.

Many on the left today are fighting for more of the same—continuing to pursue what used to be called “social democracy,” using politics to control the private sector’s excesses and harness its power for public benefit. That struggle is politically significant but theoretically uninteresting.

Make no mistake, the neosocialist movement is something different. Its roots lie not in social democracy but in democratic socialism, which seeks less to reform capitalism than to end it. And if its policies were ever put into practice, they would lead to disaster.

Rousseau and the Wealth Tax 

The French philosopher Jean-Jacques Rousseau, who was nor more of a philosopher than Barak Hussein Obama, argued that individuals were fixated with their social status, and since competition for status was a zero-sum game, they were generally unhappy. The gains that markets brought were distributed unequally and so increased the differences among people, making them more miserable. In a commercial society, he claimed, “the privileged few gorge themselves with luxuries, while the starving multitude lack the bare necessities of life.”

The neosocialists are descended from Rousseau. They downplay poverty and fetishize equality, focus on wealth distribution rather than wealth creation, and seem to care as much about lowering those at the top as raising those at the bottom.

The movement’s signature policy proposal is a wealth tax, an annual levy on household assets. Touted by economists such as Thomas Piketty, Emmanuel Saez, and Gabriel Zucman, all associated with the Paris School of Economics, the concept has been embraced by the aforementioned Democrat politicians. Sen. Warren, for example initially advocated a two percent tax on households worth more than $50 million and a three percent tax on billionaires.  As she was later pressed on how she would pay for her proposed universal health insurance, she doubled the billionaire tax to six percent. Sen. Sanders’s plan starts at taxing $16 million in assets at one percent and tops out at an eight percent tax for assets exceeding $10 billion.

The radicalism of this approach is often underestimated. Many conflate wealth taxes with higher income taxes or see them as mere extensions of a similar concept. But wealth taxes are fundamentally different instruments with much broader ramifications for economic dynamism and individual liberty.

The main effect of a wealth tax would be to discourage wealthy individuals from holding demonstrable assets. Any individual or household within shouting distance of the threshold would have to get its assets valued annually, imposing costs and creating a permanent jobs program for tax lawyers and accountants, whose chief responsibility would be to figure out ways around the law, including moving assets abroad.

A wealth tax would dramatically curtail private investment. The higher people rise on the economic ladder, the more of their resources go to investment instead of consumption. Those investments, in turn, often fuel innovative, risky ventures, which get funded in the hopes that they will eventually produce still greater gains. A wealth tax would upend the incentive structure for rich people, causing many to stop funding productive economic activity and focus instead on reducing their tax exposure and hiding their assets.

Warren contends that calculating one’s wealth tax would be as easy as calculating one’s property tax, but that is ridiculous. Take a firm that has a market value but no income—a frequent situation for startups but also common for established firms in various situations, such as a turnaround. Rich investors in such firms would have to sell their shares to pay the wealth tax or force the companies to disburse cash rather than invest in the future. Either way, the tax would discourage investment, reduce innovation, and encourage short-term thinking.

A wealth tax, finally, would force everyone whose assets were near its minimal threshold to give the government a full accounting of all those assets every year: homes, furniture, vehicles, heirlooms, bank accounts, investments and liabilities, and more. The result would be a huge expansion of the reach of government into citizens’ lives, a corresponding reduction in citizens’ privacy, and the accumulation and storage of vast amounts of highly sensitive data with few safeguards to prevent their misuse.

It is not as that bad as it seems

Apparently, that median earnings per household in the U.S. have stagnated for several decades and, for the lower deciles of the income distribution, even declined. The implication is that most people’s standard of living has flatlined or dropped over the last two generations. This, however, is not entirely true.

The first thing to note is that statistics about income brackets do not map neatly onto individual lives, because the people inside the income brackets keep changing. Those billionaires the neosocialists want to soak are not fourth-generation patrician trust-fund babies but self-made entrepreneurs, and the lower brackets at any time include many young people and recent immigrants, who tend to move up later.

Second, the rich have indeed gotten much richer—at a higher rate than those in the middle, and with those at the bottom improving the least—and inequality has certainly increased. But that does not mean the non-rich have not improved their condition, too. As a recent study by the economist Bruce Sacerdote concluded, “Meaningful growth in consumption for below median income families has occurred even in a prolonged period of increasing income inequality, increasing consumption inequality and a decreasing share of national income accruing to labor.”

Beware the games that can be played with statistics. Households today, for example, are smaller than they were a generation ago, with more people living alone or with a single parent. Even if household income is stagnant, therefore, per capita income may have risen. Then there is the changing age structure of society. As more people live longer, the share of the retired elderly is increasing, and since they have less earnings, this has led to a decline in average household income. Income, moreover, should be understood to include not simply wages and salaries but also benefits. And employers have spent ever more in recent decades on the costliest of benefits, health care—money that should be considered part of earnings. Add government transfer programs, which lower incomes at the top and raise incomes and expenditures at the bottom, and the picture changes again. It is not one of dystopian immiseration.

Putting a halt 

Capitalism drives economic and social dynamism, prosperity, and personal freedom but it can also erode tradition and stability. It produces universal gains in the long term but inequality and volatility along the way. The system’s greatest defenders have acknowledged the full range of its effects and accepted the need to address the downsides in a variety of ways, not least in order to preserve political peace and social harmony. Capitalism’s greatest critics, in turn, have always respected its awesome capacity for growth and invention, and successful progressive movements have sought to domesticate markets rather than abolish them.

That is not the game the neosocialists are playing. What is distinctive about their program is not its promises—anybody can produce impossible wish lists—but its threats. They are fundamentally uninterested in sustaining a dynamic, entrepreneurial private sector and milking its proceeds for public investment. They don’t care about the health of the geese, because their economists simply assume an endless supply of golden eggs. They abhor inequality and are out to reduce it in the simplest, most direct way possible: by lopping off the outliers at the top.

Source: The Neosocialist Delusion Wealth by Jerry Z. Muller, published by Foreign Affairs – January/February 2020 edition.