A Wealth Tax Is Shaping Up as the Left’s Worst Idea Yet

Wealth taxes are all the rage on the left these days, but they’re a terrible idea unless your real aim is to sabotage the American economy. After all, the idea of a wealth tax was first advocated by Karl Marx and Friedrich Engels in the “Communist Manifesto,” as a necessary early step on the path to socialism from capitalism.What’s wrong with wealth taxes? One hurdle is that billionaires have feet. Almost every country that has tried a wealth tax has repealed it because many of the very rich simply moved out. When the taxes were repealed, they began to move back.Plus, too, non-financial assets are hard to value. You can look up the price of a share of stock in ten seconds. The value of, say, a Renoir painting can be really determined only by selling it at auction. A tax on this sort of wealth would be an enormous windfall for professional appraisers and lawyers.Moreover, assets like paintings and jewelry are static wealth, so they do not create new wealth. Financial assets such as stocks and bonds, however, most certainly do create new wealth and are thus vital to the growth of the economy. Financial assets are capital, one of the two most fundamental inputs into a national economy, the other being labor. So to tax financial wealth is, inescapably, to tax the capital base of the American economy. A national 5 percent tax on wealth would reduce the capital base of the country by 5 percent. That’s not unlike the government deliberately raising the unemployment rate by five percentage points.To be sure, instead of spending the tax collected on new programs, the government could put the money collected into a sovereign wealth fund. But there are two problems with that. One is that the fund would quickly become the 800-pound gorilla in the financial marketplace. Another is that politicians, who would necessarily run the fund, can only make political, not economic, decisions.To see why, imagine there’s a national widget crisis, and two companies, A and B, are working hard to develop a technological solution to the problem. Most people think Company A is on the right track. What if Senator Snoot, though, the chairman of the Senate Widget Committee, represents the state where Company B is headquartered, employs 68,000 workers, and makes generous political contributions to local office holders?Which company do you think Senator Snoot is going to push? This helps explain why no socialist country has ever flourished economically.If billionaires were required to pay a significant tax on their wealth, they would have to dump billions worth of stock and bonds to raise the cash. That could tank the markets, causing millions of middle-class Americans to see their 401K’s and IRA’s shrink significantly in value. It would also saddle the billionaires with massive capital gains taxes. A double whammy.A wealth tax would, in the end, amount to a tax on risk-taking, which is vital in a dynamic and rapidly evolving economy.Great fortunes are artifacts of great new ideas skillfully executed. They come about only because individuals are willing to take the risk of producing a new product or service that has unproven potential. And it is no small risk. The history of the world economy since the start of the Industrial Revolution in the mid-18th century is littered with good ideas that didn’t pan out in the marketplace. Indeed, the sudden appearance of an important new technology always sets off a capitalist Darwinian competition, with many more losers than winners. In 1903, the year that the Ford Motor Company opened for business, 56 other automobile companies opened in the United States as well. And 27 automobile companies went bankrupt that year.Today, half of all new corporations fail within five years. At least 70 percent of those financed with venture capital do so. And besides capital, new corporations require vast amounts of sweat equity and time if they are to become established and successful. Before people will take these great risks, they must have dreams of great rewards to justify the taking of them. If economic success, which is to say, accumulated wealth, is taxed heavily, future risk taking will be much reduced as a result. About two-thirds of those on the Forbes 400 list made their own fortunes, only one-third inherited substantial wealth. Enact a wealth tax in this country, and watch that ratio change for the worse over the next few decades as the entrepreneurial spirit that made the American economy the wonder of the world slowly withers away.

A Wealth Tax Is Shaping Up as the Left’s Worst Idea Yet

A Wealth Tax Is Shaping Up as the Left’s Worst Idea Yet

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