Wealth Taxes Will Not Make the Political System Perfect, But So What?

by Neil H. Buchanan

Setting aside the fact that the U.S. political system is melting down as we speak, there remains an interesting set of policy proposals that the next president (if there ever is another president) might decide to address.  Among the most significant is the possibility of a wealth tax.  Unfortunately, for every good analysis of wealth taxes, there seem to be an endless number of fatuous, dishonest, or muddled responses.

Yesterday, Professor Dorf offered one of the good ones.  Using former New York City mayor Michael Bloomberg's unlimited political spending as a backdrop, Professor Dorf pointed out that Senators Elizabeth Warren and Bernie Sanders could find themselves benefiting from Bloomberg's bags of money during the general election even as they argue that such wealthy people should have their wealth taxed by the federal government.

Most interestingly, Professor Dorf argued that Warren is, if anything, underselling the effectiveness of her wealth tax proposal, making a political calculation that she can get voters to support her plan if she assures them that wealthy people will not actually feel the tax, because it is only "2 cents!"  Professor Dorf summarizes Warren's assurances regarding the wealthy thus: "[T]hey can afford it; they'll still be fabulously wealthy."  Which is true, both in terms of the impact of the tax (the Warren wealth tax would indeed leave the fabulously wealthy fabulously wealthy) and Warren's selling of it.

This is rather different, to say the least, from the plutocrats' nightmare of pitchfork-wielding populists screaming "Billionaires should not exist!" and tossing the wealthy into the streets.  My guess is that they have all memorized the scene from "Dr. Zhivago" in which the aristocratic protagonist in Leninist Russia finds his mansion filled with ungrateful proles and shouts, "Whose house is this, anyway?"  (Their response: "Ours!!")

As it happens, I attended a conference the other day in which three economists and a law professor discussed wealth taxation, which had already inspired me to write about some of the issues that Professor Dorf teed up in yesterday's column.  (Side note: As is often my practice when criticizing arguments, I am not naming or linking to the economists in question or identifying where they spoke.  The point is not to attack a person but to discuss her or his reasoning and motivations.)

Surprisingly, the economists' biggest error was not in their misunderstanding of legal issues but in their failure to apply even their own standard tools to understanding how a wealth tax works.  When it comes to attacking wealth taxes, it seems that some economists are willing to stop "thinking like an economist" in the pursuit of excuses not to tax the rich.

Before I get to the most important of the errors that the panelists made, a couple of light appetizers are worth sampling.  What emerges is the suspicion that "anything goes" when it comes to the reactionary response to wealth tax proposals.

One of the remarkable things about panels featuring DC insiders who are policy wonks is that nearly everyone exudes a sense of bored in-the-know jadedness, which includes a surprising amount of simply fuzzy thinking.  It is sometimes difficult to know whether the speakers -- who, to be clear, are very good at certain things that make them experts in some meaningful senses -- are lazy or actually cannot think clearly about issues that are beyond their very particularized skill set.

As I wrote a number of years ago, things often do not go well when economists try to "commit politics."  This is in large part because, as I wrote just last year, economists come out of our extremely demanding math-based graduate programs thinking that everything else is easy by comparison.  Philosophy?  Just talking, thus easy!  Politics?  A matter of opinion, so easy.  Sociology?  Ewww, not even a science, very easy!

This is not necessarily a problem when economists talk to each other about their academic papers.  But the DC-insider conference scene is supposed to appeal to non-economists who care about real-world policy disputes, which means that the economists need to say things without resort to matrix algebra or obscure theoretical jargon.

Thus, warming up to the topic of why wealth taxes are (in her opinion) problematic, one economist at the conference asked whether it made sense -- even if one thinks (as she made it clear that she did not) that inequality at the top is a problem -- to use the tax system to solve the problem.  Why might it not be?  Because, she claimed, we need to know whether the tax system caused the rise of inequality in the first place, and "if taxes weren't what caused it, then obviously they won't be able to fix it."

Again, it is difficult to know whether this is simple laziness or something worse.  First, it is very obvious that the neoliberal program to reduce taxes at the top played the starring role in the rise of inequality over the past four or five decades.  But second, what in the world does it mean to say that the only way to fix a problem is to reverse the one and only thing that caused it in the first place?  While it is true that fixing the underlying cause can sometimes be effective, it is simply false to say that there is no other way to cure a problem.  Yet that line was tossed off with great self-assurance.

That was surprising, because I would not have thought that economists would be prone to that category of logical error.  On the other hand, I was not at all surprised that two of the three economists simply made no effort to understand the constitutional questions involving a wealth tax.  They were more than satisfied to say things like: "Here is a range of estimates of possible revenues from a wealth tax.  But I've heard that it could be unconstitutional, so maybe the number is zero."

It is not that simple, of course.  As Professor Dorf put it in his column yesterday, "the Supreme Court might strike [a wealth tax] down as a 'direct' tax that needs to be apportioned but isn't. (The Court shouldn't strike it down, but that doesn't mean it wouldn't.)"  What he means is that wealth taxes could be (wrongly) characterized as direct taxes, which the Constitution says must be apportioned.  In a Verdict column last year, I described the underlying issues and pointed out that it is simply not true to say that "a wealth tax is unconstitutional if it is deemed a direct tax."  Wealth taxes, even if direct, can be imposed without violating the Constitution.

At most, then, an unapportioned wealth tax would have to be apportioned, either by changing it after the Supreme Court misrules or by putting in a fallback provision when passing the unapportioned version. But that is far different from saying (as Bloomberg himself does) that wealth taxes are per se unconstitutional.

As I noted above, these kinds of errors are probably to be expected when economists get together to talk about policy questions.  The conversation gets a bit loosey-goosey, and people sometimes leave their comfort zones and vamp on other topics that they think are easy.  Logical errors are made.  Legal issues are mangled.  So it goes.

What truly surprised me, however, was when two of the economists on the panel said (without objection from the other economist or the law professor) that a wealth tax simply would not do any good because the fabulously wealthy will still be fabulously wealthy.  That is as fundamental an error in economic reasoning as there can be.

Why?  Economists argue that everything is about marginal effects.  For example, a standard anti-tax argument from the economic right is that, say, an income tax will discourage people from working.  Discourage some people, not end entirely.  "Thinking like an economist" is, at its core, supposed to be about noticing that effects are generally not absolute.

When I compare my economic training to my legal training, the one gold star that I always give to economists is that they are not trained to say (as lawyers too often are) that "this won't solve the whole problem."  One law professor, agreeing that this was a problem among those with legal training, explained it to me by saying that "law students learn about binaries: guilty/not guilty, breach/not in breach, liable/not liable, ethical/sanctionable."  Economists know -- or are supposed to know -- that one can improve a situation without perfectly solving it.

And that is exactly what Warren's plan would do.  Professor Dorf's summary nails it:
"From the  perspective of political economy, restricting individual fortunes to something in the neighborhood of $50 million would be a good thing--a feature of a wealth tax, not a bug. A person with a $50 million fortune might spend tens or even hundreds of thousands of dollars on politics in any given year, which gives that person outsized influence but does not grossly distort the system as a whole, in the way that multibillionaires' expenditures in the tens or hundreds of millions can."
In other words, we can imagine that the political system will be improved, albeit not perfected, by a wealth tax.  Even the remaining billionaires will have fewer billions to play with, and there will be fewer billionaires in the first place.

To be clear, this is an empirical prediction.  To put it in economic terms, it could turn out that "the wealth elasticity of political influence is zero," at least above a certain level.  Maybe a world with ten people worth over a billion dollars each would be just as politically corrupted as a world with one hundred people worth over fifty billion each.  Maybe, but the political system became marginally more corrupted as more billionaires came into existence, and -- to correctly apply the reasoning that I critiqued above -- maybe the effect works in reverse.

As it happens, there is plenty of empirical evidence that conservatives' oft-predicted reduction in people's work effort in response to the income tax is nearly nonexistent (other than for secondary earners).  But there is no such body of empirical work regarding the effects of wealth on politics, and all of the evidence that does exist suggests that the effect can be substantial (and harmful).  One would think that an economist would default to the general prediction of marginal effects rather than jump to the extreme prediction of zero effects.

It is not, therefore, impossible to imagine that taxing wealth would do nothing to reduce political dysfunction.  It is, however, notable when economists (without explanation or even acknowledgement) suddenly and conveniently flip their presumption from "marginal policy changes lead to marginal effects" to "marginal policy changes do not solve the problem because they are merely marginal."

What could explain this?  What, oh what, might motivate supposedly scientific economists to commit the kind of logical error that they are so quick to mock in lawyers?  Maybe they are more committed to the conclusion than they are to careful inquiry.  They are against taxing rich people, and they will say anything to support that conclusion.  Am I accusing them of bad faith?  Yes.  Yes I am.