For almost everyone living in developed countries, taxes are essential. The infrastructure that empowers our economy and standard of living is based upon the communal pooling of resources. There are other ways to fund physical and social infrastructure, but the key is neutrality; we would not want every road to be privately owned and tolled. Despite its benefits in enabling civilization, taxes are a massively controversial subject. The past year has seen increased discussion of this issue, brought on by the upcoming American presidential election with many fiscally progressive candidates running. Whether it be Andrew Yang, Bernie Sanders, or the eventual Democratic nominee Joe Biden, they all espoused increasing or modifying taxation on America’s wealthiest.
Its premise is simple: wealth inequality has reached its peak in recent memory, and the “one percent” of wealth holders have been increasing their share of American wealth. Bernie Sanders’ plan of direct taxation of the wealthiest would place $4.35 trillion over the next decade into “Medicare-for-all, affordable housing, and universal childcare” (Vox 2019), which can address some of the root causes of low wealth. Even Joe Biden, a moderate by most accounts, plans on raising $3.8 trillion over the same period. Is this still the same kind of tax as the ones that pay for roads? The key is neutrality. When the tax is incurred only on the wealthy, and the benefits only apply to lower wealth individuals, it is essentially wealth transfer or wealth redistribution. Therefore, this is a different kind of tax, antithetical to proper principle, political consideration, and sound economic practice.
Instead of discussing the minutiae of tax policy, let us consider the bigger picture. What are the qualitative justifications for heavily taxing the “richest of the rich?”
You have likely heard the saying “taxation is theft.” In principle, that is true for direct wealth transfer (but does not extend well to real-world taxation). If you pack your child a delicious lunch, the school has no right to take any part of it from them, no matter how much excess there is. Even if they can only eat a small portion of it, it is still theirs until they decide otherwise. The same extends to wealth; your child’s pocket change would be subject to the same principle, as does their academic achievement. It does not matter if your child did nothing to earn that lunch. It does not matter if their classmates are more hungry or had smaller lunches. If you baked extra cookies that you could not finish, it would be kind and morally right to share that with your child’s classmates. Still, a moral obligation is not a responsibility; you have the right to keep the cookies, or even throw them out, because they are yours.
Most people know Ronald Reagan and his “Reaganomics” policies. The difference between “trickle-down” economics and supply-side economics is that supply-side economics entails reducing taxes for all, not only for the wealthiest. Amongst the informed and unbiased, both sides of the aisle oppose the “trickle-down” approach, and Russia is a prime example of its failure. In actuality, if the rich are allowed to make more money, they will invest it. Wealth is typically not in the form of cash or even tangible possessions like real estate and vehicles. The majority of wealth is in investments, either Retained Earnings which count as equity, or equity stakes in either new ventures or existing ones. These businesses create more supply and produce more—either in quantity, efficiency, or quality. In any case, the amount of available credit is increased. As well, wages typically increase, although this is not the point; having more and better items being produced would increase effective purchasing power. $500 can purchase a much better TV than the same dollar amount five years ago, even though its “value” (i.e. in gold) and “time value” (how many hours you’d need to work to get it) is relatively the same ($38 difference, according to the Bank of Canada). Although the TV manufacturer undertakes these improvements, the profit, and therefore the tax burden, would go towards the wealthy shareholders and executives.
In practice, overtaxing the rich is also unrealistic. As the “Iron Lady” Margaret Thatcher said, the problem with socialism is that eventually, you run out of other people’s money. Although wealth redistribution is not socialism, the idea is the same. If we create a nation without billionaires, the one percent will still exist, just with less wealth. The Pareto distribution predicts that the top twenty percent of people will almost always have eighty percent of the wealth, no matter what. Whether or not advocates for wealth redistribution have a stopping point does not matter, because the exact numbers are never accurate nor crucial to the idea of wealth redistribution. Globally, wealth inequality is multitudes worse than it is in the U.S, and it is also where the idea of the top 1% having 99% of the wealth comes from. In reality, the top 1% of Americans have 39% of American wealth. In a way, it would be hypocritical for almost all North Americans to criticize the one percent, as we are already part of it when considering the global picture.
The problem is seeing wealth inequality as a fundamental injustice. Inequality, for better or worse, exists as a matter of physical certainty. That does not mean we should stand idly by; we still should make sure there are equal opportunities for all, especially for the most disadvantaged and the least wealthy.
Besides, much of the wealth at the top of the distribution is not accumulated wealth (“old money”) but created wealth. Looking at the wealthiest individuals, most of them created wealth, from Rockefeller and Carnegie to Gates and Bezos. It does not mean they made that wealth ethically, but it was created and not merely willed into existence as a dictator would. Wealth is often thought of as a “pie” where pieces are divided up. Obviously, the piece can increase as the economy grows. Even if relative purchasing power stays the same with each generation, the quality of products and services increases dramatically. By discouraging wealth creation at the very top, the pie would shrink. Even if the working class receives a more significant chunk, the total amount of “pie” they receive can very well diminish. This requires their piece to increase in proportion to maintain the same amount of pie, which leads to disaster.
Even from a purely selfish perspective, when you take other peoples’ money and put it into your pocket, you will eventually become the person to take from, either directly or indirectly. This brings the conversation back to the first point; in principle, a person can choose where their money goes. Suppose the family with excess cookies can choose where their cookies go. In that case, they can donate it to whoever they desire (e.g. the child who loves cookies, or whoever is still hungry), instead of being forced to split it amongst the class, where the utility of the donation is reduced because not everyone needs cookies to the same degree.
Of course, it cannot be assumed that every person is reasonably charitable. There is undoubtedly a sizable chunk of the population that would be completely selfish with their money. Despite that, the average person is still more efficient with their money than the government, because the average person cares. They care about paying for their disabled neighbour’s lawn care. They care about the opportunities their local Little League provides. They care about their child’s friend who needs transportation to their music lessons. To the government, these are all luxuries that do not need to be funded. The government will never care about the people behind these needs, but the people might.
This is not to say that government funding and taxes are undesirable. It is simply that beyond societal needs like utilities, infrastructure, and essential services, the marginal benefits of increased taxation decreases precipitously. No politician wants to increase taxes because as the reasons above dictate, no one likes to be taxed. It is much easier to tax a small proportion of the population to the detriment of the rest; it’s so expected from politicians that we take it for granted. It is in that regard that we must not let down our guard, and not shy away from making difficult choices.
Golshan, T. (2019, September 24). Bernie Sanders's wealth tax proposal, explained. Retrieved September 11, 2020, from https://www.vox.com/policy-and-politics/2019/9/24/20880941/bernie-sanders-wealth-tax-warren-2020
Image from Equitable Growth.