I liked Elizabeth Warren when I interviewed her. That was many years ago. Back then she was a professor at Harvard Law School. She was not involved in politics. Instead, she had researched the real causes of personal bankruptcy with Teresa Sullivan, then a dean at the University of Texas. Later, she wrote a book with her daughter exploring how two-earner families were as vulnerable as the single-earner family of yore.
Bankruptcy and family finance: Then and now, both are serious meat and potatoes issues.
But in politics I find liberals who want to scold and punish the rich for being rich as wrong-headed as conservatives who like to scold and punish the poor for being poor.
Don’t get me wrong. There are lots of reasons for the rich to pay more taxes. One reason is simple. As Willie Sutton once said of robbing banks, “That’s where the money is.” We can say the same for the wealthy. They’ve got the money.
Another reason is popularity. Everyone likes taxes that are paid by other people. So if you decide to tax the 1 percent, you can be pretty sure the remaining 99 percent will be enthusiastic. All will agree, such taxes are unusually wise.
But the whole idea of taxing wealth is kind of stupid. Or, to express it in a more polite way: Taxing wealth is counterproductive.
Here are three reasons:
The economics of taxing wealth.
Scratch anyone involved in real estate investment and they’ll tell you about something called “the tax capitalization effect.” All other things being equal, when you raise the taxes on something, its value will decline.
Why? Because the investment yield will be lower than the yield on an otherwise identical property with lower taxes. The same thing happens in residential real estate. A condo with high homeowner’s association fees will sell for less than an identical condo with lower homeowner’s association fees.
It’s the same with other forms of wealth. If owning something means you’re liable for this or that tax, its value will be lower than other investments that aren’t subject to those taxes. Skeptics should consider tax-free bonds. They yield less than taxable bonds because investors know they’ll have the same spendable income from their tax-free bond as from a comparable taxable bond.
The more you tax wealth, the less valuable it becomes. It’s that simple.
If the tax takes all the income or potential gain from an investment, there’s no reason to own it. The price will fall as investors look elsewhere. So if you are taxing wealth, the less valuable it is, the less tax revenue you’ll get.
Smart tax collectors don’t want to kill the proverbial golden goose. They want a steady supply of eggs.
The practical side of taxing wealth.
In the world of paychecks that most of us live in, paying taxes is simple and inevitable. Taxes come out of your paycheck before you even see it.
In the world of assets, paying taxes is, well, flexible. Some would go further. They’d say taxes are optional. At the level of minor wealth, savvy lawyers and flexible accountants can make taxable income disappear.
Here’s an example. I once asked a successful real estate investor if he had a substantial income tax burden. His brusque answer: “Anyone in real estate who pays taxes is a damned fool.”
At the level of major wealth, well-funded lobbyists can help get legislation passed that gives major tax breaks for very specific companies or industries. Earlier this year an analysis by the Institute on Taxation and Economic Policy found that 60 of our largest corporations paid no taxes while enjoying $79 billion in profits. Yes, you read that right – no taxes but $79 billion in profits.
And it’s all, as they say, “perfectly legal.”
The list included highly visible companies in very different industries. Amazon paid no taxes. Neither did Netflix or Chevron or Delta Airlines or Eli Lilly or General Motors or IBM. (You can see the full list here.)
For a darkly comic introduction to the world of tax avoidance, watch the Netflix movie, “The Laundromat.” You can see the official trailer here .
The bottom line: Any tax revenue that doesn’t disappear though the taxation of wealth in itself could easily disappear through carefully wrought tax legislation.
Wealth is a good thing, so why tax it?
Finally, wealth itself isn’t a bad thing. It’s what makes the world go round. We can get really basic about this. In his book “The Stages of Economic Growth: A Non-Communist Manifesto,” the late economic historian W.W. Rostow, pointed to “the takeoff point” – the amazing moment when a society saves enough that the amount of capital per person begins to grow. That takeoff point ushers in a world of growth, new possibilities and expanding opportunity.
By Rostow’s definition, taxing wealth is a good way to cause a crash landing.
Related columns:
Scott Burns, “A columnists Thanksgiving,” 11/27/2003 https://scottburns.com/a-columnists-thanksgiving/
Scott Burns, “The real change in family finances,” 9/23/2003 https://scottburns.com/the-real-change-in-family-finances/
Scott Burns, “H.R. 975: Another reason to avoid credit cards,” 3/02/2004 https://scottburns.com/h-r-975-another-reason-to-avoid-credit-cards/
Sources and References:
Teresa Sullivan, Elizabeth Warren and Jay Lawrence Westbrook, “The Fragile Middle Class: Americans in Debt” (Yale University Press, 2000) https://www.amazon.com/Fragile-Middle-Class-Americans-Debt/dp/0300079605/ref=sr_1_7?keywords=Warren+and+Sullivan&qid=1575408500&s=books&sr=1-7
Elizabeth Warrant and Amelia Warren Tyagi, “The Two Income Trap: Why Middle-Class Parents Are (Still) Going Broke,” Basic Books, 2003 https://www.amazon.com/Two-Income-Trap-Middle-Class-Parents-Still/dp/0465097707/ref=sr_1_1?crid=L78041GUIPIK&keywords=the+two+income+trap+by+elizabeth+warren&qid=1575477092&s=books&sprefix=The+two+income+%2Cstripbooks%2C166&sr=1-1
Matthew Gardner and Steve Wamjhoff, “60 Profitable Fortune 500 Companies Avoided All Federal Income Taxes in 2018,” 4/11/2019 https://itep.org/notadime/#table
Official Trailer for “The Laundromat” on YouTube https://www.youtube.com/watch?v=wuBRcfe4bSo
W. Rostow, “The Stages of Economic Growth: A Non-Communist Manifesto,” (1969, Cambridge University Press) https://www.amazon.com/Stages-Economic-Growth-Non-Communist-Manifesto/dp/1684221579/ref=sr_1_1?keywords=W.+W.+Rostow&qid=1575413728&s=books&sr=1-1
—————————————–
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo: Scott Burns, Lobster boats in Maine
(c) Scott Burns, 2019