Thursday, January 30, 2020

What is the Most Misleading Critique of the Wealth Tax Yet?

by Neil H. Buchanan

It is hardly surprising that the center-right and the far-right are fighting hard against wealth tax proposals.  This commitment to regressivity can arise from a naive/stupid/evil belief in trickle-down economics -- Whatever is good for rich people ends up being good for everyone else, trust us! -- or from a fundamental commitment to the indefensible idea that rich people should always be able to keep their stuff (which assumes that they accumulated that stuff without any help from a government that provided a stable legal system, educated workers, infrastructure, and so on).

Either way, there are people who are simply horrified at the idea of a government taxing the wealth of the super rich, and they have made many embarrassing arguments in service to that belief.  But which argument against the wealth tax is truly the worst?  I might have an answer.

With so many moneyed people so interested in defeating all proposals to tax their riches, it is inevitable that a lot of bad arguments will be trotted out and treated as if they are serious ideas. That is what think tanks are for, after all -- allowing rich people to throw a pittance at people with advanced social science degrees to get them to say what the rich people find pleasing. Well funded think tanks then become self-perpetuating propaganda machines, with the press treating them as credible experts in an infinite regress of status reinforcement.

But it is not merely the think tanks.  Former Treasury Secretary Lawrence Summers has spent the last year dishing out disingenuous analyses claiming to prove that wealth taxes will not generate as much revenue as proponents claim.  Last April, Summers and a co-author published an influential op-ed in The Washington Post in which they offered a caveat-laden critique of Senator Elizabeth Warren's wealth tax proposal, claiming that it will collect much less than Warren's people claim.

What was remarkable about Summers's op-ed was that he not only offered no estimate of the likely revenues from a wealth tax, but he and his co-author actually backed off of a previous low-ball estimate that he had circulated: "We would be surprised if the $25-billion-a-year figure we suggest was not a significant underestimate of the revenue potential of a 2 percent wealth tax. But it is likely extremely premature to bank on anything like the $200 billion plus that Saez and Zucman [Warren's economic advisors] estimate."

Yikes.  After a whole slew of "we don't actually knows," their best conclusion is that revenues will be somewhere between $25 billion and $200 billion-plus?  Presumably, readers are expected to think that it will be somewhere "in the middle" (somewhere just above $100 billion, perhaps), but Summers provides no way at all to guess whether it will be at the low end or the high end.  After all, it is "likely premature" to conclude that $200 billion is the right number.

Importantly, Saez and Zucman had based their estimate on an actual economic analysis, in contrast with Summers's musings and suppositions about possible tax avoidance strategies (and his unspoken assumption that such strategies cannot possibly be combated by, say, actual enforcement of the law).  Saez and Zucman even specifically noted that theirs "is not a 'best case' scenario but is itself a middle-ground. [I]t is possible that [r]evenue would exceed the $212 billion we estimate."

But Summers managed to turn Saez and Zucman's modesty against them, transforming their middle-ground estimate into a pie-in-the-sky top-end rosy scenario to contrast with his supposedly more realistic $25 billion -- more realistic, yet somehow not actually worth defending (or replacing with an estimate of his own).

The anti-wealth tax arguments get even worse than Summers's sophistry, however.  One of the supporting arguments from anti-wealth tax ideologues is that many European countries have recently abandoned wealth taxes.  And if even those socialistic Europeans have turned their collective back on wealth taxation, the argument goes, then that truly tells us something, right?  Hardly.

For one thing, Saez and Zucman have already taken into account the evidence from those countries in determining what to do and what to avoid in designing a U.S. wealth tax.  The major takeaway is that the level of wealth at which the tax begins should be relatively high.  France's former wealth tax started at $1 million, whereas Saez/Zucman propose to exempt the first $50 million.

Even more importantly, the mere fact that several countries have dropped wealth taxes does not tell us why they chose to do so.  The reality is not that these countries collectively thought, "Hmmm, wealth taxation isn't working as we had hoped, so let's not do that anymore."  Instead, right-wing governments replaced left-leaning governments in many countries, and the new governments rewarded their wealthy patrons by nixing wealth taxes.

To put it in a different context, should we take anything that the U.S. has done under Donald Trump and take that as evidence that "the world has noticed" that the previous policies did not work?

Trump withdraws the U.S. from the Paris environmental agreement.  He abandons the Iran nuclear deal.  He makes workplaces and consumer products less safe.  Surely, this happened because America decided that the previous policies were all wrong?  Obviously not.

Just as rightist President Nicholas Sarkozy of France dropped leftist Francois Mitterand's wealth tax (and neoliberal centrist Emanuel Macron is in no way interested in reviving it), Trump's moves are not proof that the previous policies were unpopular or unworkable.  None of the elections in question were in any way test votes about wealth taxes, nor was Trump's non-majority 2016 win an endorsement of the Republicans' long-term anti-worker, anti-consumer, anti-environmental agenda.

This is, in other words, a different version of the silly "We have a mandate from the people" claims by which politicians do unpopular things but claim that winning justifies everything.  The outcomes of the elections in Europe over the past decade are in no way proof that wealth taxes are a bad idea.

That argument -- that other countries' abandonment of wealth taxes is proof of the inherent badness of those taxes -- is a strong finisher in the contest to determine which argument from the right against wealth taxes is the most ridiculous.  There is, however, another contender.

Often, when I am reading the news, I roll my eyes or groan when coming upon a bad argument.  Almost as often, I will then bookmark the offending article for possible use in a future column.  Rarely, however, do I actually say out loud, "Christ, this is stupid!" and then write those words verbatim into my personal notes for later reference.

What brought out that response?  A New York Times article about the right-wing reaction to Warren's wealth tax proposals included a strange claim from an economist at a right-leaning think tank: "The tax rate on capital income at the top could easily exceed 100 percent once the wealth tax is in there."  Allow me to explain the mechanics, at which point I think the silliness of the argument will become obvious.

I should note that the purveyor of this theory has a well deserved reputation as a solid public finance economist, that is, for having an unexpectedly large amount of professional integrity, given his position.  Even so, there are times when one's choices of argument reveal a willingness to mislead, at best.

The argument, such as it is, is that we can think of the income that a stock of wealth generates in any given year and compare it to the wealth tax rate to determine a "logically equivalent" income tax rate.  Suppose that you have $1 billion in capital, and it is generating a 4 percent annual return.  A 6 percent wealth tax would use up all of the 4 percent return, plus two percent more.  So, voila, the "tax rate on capital income" is 150 percent (because you pay one and a half times in tax what you received in income derived from your wealth).

But other than sounding like a big number, what does that actually mean?  The economist who is pushing the idea that this is a meaningful number admits (to his credit) that this cannot possibly mean what an actual income tax rate above 100 percent means.  After all, if I were to face a 150 percent tax on my salary, I would have every reason not to earn a salary.  (This is the extreme end of the so-called Laffer Curve, which no one disputes.  Of course virtually no one would work if they kept literally none of their earnings after taxes.)

A wealth tax, however, simply does not work that way.  Our person with $1 billion subject to the 6 percent wealth tax -- and to be very clear, under the Warren plan this person would have to have $2 billion, because Warren would tax most of the first $1 billion at 2 percent (and $50 million would not be taxed at all) -- would pay $60 million on that second billion, out of which $20 million would come from the principal of the wealth.  Bummer, I know, but that simply means that the total amount of wealth would drop very slowly over the years.  It is not a stop-everything moment, in the way that a 100-plus percent rate would be on salaries.  A billionaire could decide to give away his wealth entirely rather than pay the tax, I guess, but would that be a bad thing?

Again, even the inventor of this shell game admits that the numbers he computes are not comparable to income tax rates, yet he insists on pointing out that "[t]he tax rate on capital income at the top could easily exceed 100 percent."  I have heard him argue elsewhere that he merely wants people to be "aware" of this mathematical artifact.  If you think 150 percent tax rates are high, he says, then you should at least be aware that wealth tax rates that look low are actually that high.

But why make that apples-to-bathrobes comparison?  We form our intuitions about income tax rates in the income tax context, and those are simply not transferable to the wealth tax context.

I should add that I have also heard a center-left economist offer a telling empirical response to this argument.  He pointed out that nobody -- simply nobody -- who has billions of dollars in wealth earned it at a 2, 3, or 4 percent annual rate of return.  Indeed, billionaires like Jeff Bezos (of Amazon and The Washington Post) see rates of return on the order of 20 percent annually.  In that context, a six percent tax would -- under this silly conversion algorithm -- be the equivalent of a 30 percent capital income tax rate.  That is still lower than the current top marginal income tax rate for regular income (even after the Republicans rammed through their 2017 tax giveaway to the rich), which is 37 percent.

That is a very good point, but it does fall into the "even if what you say is true" trap, by which one side of an argument concedes only for argument's sake that something might be valid, only to find that the other side uses the temporary concession as evidence of a more general retreat.  Compare this to, for example, Saez and Zucman's decision to make modest assumptions in coming up with their revenue estimate, only to quickly find themselves treated as the crazy extreme.  "Well, your numbers are higher than my random guesses, so let's compromise."

Obviously, I am not being serious when I say that I am ranking bad arguments as if they can be compared in some objective or quantitative sense.  I do, however, find the arguments that I discussed here to be jaw-droppingly bad.  And because the "income tax equivalent" argument is simply so weird, it is worth spotlighting just how content-free it actually is.

The ultimate point is that none of the arguments against wealth taxes currently on offer withstand even a tiny bit of scrutiny.  That ought to tell us something.