Taxing the billionaires
Taxing the billionaires
Thinking about the incentives and disincentives of a wealth tax.
Have you ever played Monopoly, and one player ends up owning Boardwalk, Park Place, and all the railroads, while you’re left with Baltic Avenue? That’s how many folks feel when they see the staggering wealth of individuals like Elon Musk. “Pay more tax!” is the common cry. But here’s the kicker—wealth isn’t the same as income, and it’s the latter that’s taxable.
When we read that Musk is worth, say, $100 billion, that doesn't mean he has a Scrooge McDuck-style vault filled with billions in cash. His wealth is tied up in the companies he’s built. Those billions only become “real” money if he sells his shares, and selling shares in the company he built is likely to have a large ripple effect.
Suppose you buy a house for $100,000, and ten years later it's worth $500,000. Sounds like you’re doing pretty well, right? But that extra $400,000 isn’t sitting in your bank account. It’s potential money, if you’ll forgive the wording, accessible only if you sell the house. And if you did sell, you’d have to find somewhere else to live.
Similarly, if Musk were to sell a substantial amount of his Tesla or SpaceX shares to pay a tax bill, he could lose control over the companies he’s spent his life building.
These individuals also contribute to society in ways that aren’t as easy to quantify as a tax bill. SpaceX is revolutionizing space travel and could be key in securing the future of the human race. Tesla is a major player in the transition to sustainable energy. These ventures require money – lots of it – and that’s where the wealth of people like Musk comes into play.
None of this is to suggest our tax system is perfect. But when we talk about taxing the wealthy, it’s important to figure out what we’re really talking about. With a wealth tax, we are talking about a tax on the unrealised gains of a person’s assets—the cash they do not yet have in their hands, but could if they sold their assets at current market values.
Money talks. Or rather, it whispers promises of what could be. That house, that business, that college education for your children – all within reach if you earn and save enough of it. That’s an incentive to earn and to save. The possibilities of what you and your family could do in the future provide prospective incentives that guide your behaviour.
A tax rebate for married couples is an incentive to marry your girlfriend, and a disincentive to keep going steady with her. That tax policy guides your prospective behaviour. Similarly, a hefty corporate tax disincentivises you from starting a company where you live, and incentivises you to seek tax advice from a clever accountant.
At first glance, a wealth tax seems fair. The more you have, the more you contribute. The rich pay more, easing the burden on the middle class and the poor. Sounds like an enticing way to narrow the gaps in income between people. It promises a greater good: money for social programs, education, health care.
But wait, not so fast. Money isn’t just a medium of exchange, it’s a tool of motivation. What happens when you penalise people for the wealth they accumulate?
Picture a successful entrepreneur, but someone other than Musk this time. She’s spent years building her business, pouring time and effort into something that now brings her wealth. Along comes the wealth tax. Each year, a slice of her wealth is taken away. What does that do to her motivation?
She could continue pouring her life into the business, knowing she’ll lose a bigger chunk each year. Or she could decide it’s not worth it. Maybe she slows down, stops expanding. Maybe she decides not to start her next business. The ripples of that decision spread out, affecting employees, customers, and even competition. The effects on the prospective incentives of people within the economy are profound and long-lasting.
Wealth is not just a stack of money in a vault. It’s often tied up in assets—businesses, property, stocks. To pay a wealth tax, people might need to sell these assets. This selling pressure could destabilise markets, reduce asset prices, and lead to economic downturns.
How do you accurately value a privately-owned business or a piece of art? It’s subjective and can lead to disputes, lawsuits, and a clogged up legal system. What might happen at the end of each tax year when all the people liable for a wealth tax face a payment deadline? Many billionaires all selling their assets to pay a tax on their unrealised gains is likely to trigger a market crash, as billions upon billions of dollars’ worth of assets are dumped at around the same time, driving down the very same market values used to evaluate those assets for the purposes of the tax.
The rich might take their wealth with them to other countries, or they may not. The point is that the difference in tax structures creates a harsh disincentive for staying in the country with the wealth tax, and that disincentive is likely to make the wealthy store their wealth in a place that does not have a wealth tax. Brain drain, the loss of philanthropic contributions, and a shrinking tax base—what economists call capital flight—can damage an economy and the society around it for generations, not just years.
A wealth tax is not just a tax; it’s a shift in incentives. It asks us to consider not just the good it promises, but the potential repercussions that might echo through the economy. Wealth is not just a measure of success, but a catalyst for actions and reactions in the economy.
Monopoly is a game, and economics is not. In Monopoly, wealth is clearly defined, and the game ends when one person has all of it. In the real world, wealth can be as ethereal as the paper money in that game, and the game never really ends. After all, you can’t take it with you.
So next time you hear someone call for the likes of Musk to pay more taxes, remember to consider the Boardwalks, the Baltic Avenues, and everything in between. Because in the game of life, wealth is a lot more complicated than the roll of the dice.