Democratic presidential candidates appear driven by tales of the rich exploiting the downtrodden and support higher taxes to redress injustice — Sens. Elizabeth Warren and Bernie Sanders want a federal wealth tax and higher levies on estates.
Warren is most intriguing, because she tries to make the case for a wealth tax more in terms of correcting adverse forces within the capitalist system than as a means to finance, for example, Medicare for all or a Green New Deal.
She proposes a 2% annual tax on households with assets exceeding $50 million and 3% on those exceeding $1 billion, and cites economists Emanuel Saez and Gabriel Zucman to bolster her case for “capitalism with rules.”
Saez is the occasional research partner of Thomas Piketty who created a stir in 2014 with his book “Capital in the Twenty-First Century,” which allegedly documented the trend for wealth and income to become increasingly concentrated in market economies.
Chris Giles of the Financial Times and others found numerous errors in the statistics and basic computations. Martin Feldstein effectively argued that death, estate taxes and division of wealth among multiple heirs—not to mention the penchant of scions like Andrew Carnegie to endow charitable foundations—tend to dissipate family wealth.
Wealth always begins with savings and better ideas. Entrepreneurs raise capital—that is how we got Sears SHLDQ, -50.85% , Macy’s M, +1.25% and AmazonAMZN, +1.08% and IBM IBM, +1.44% , Microsoft MSFT, +1.54% and GoogleGOOG, +0.78% in the first place. Eventually, though, most businesses fall from the control of founding families and patriarchs become portraits on board-room walls.
If wealth did not consistently dissipate, income would be increasingly concentrated, as Saez and Piketty allege, among a coupon clipping, unproductive aristocracy. However, recent efforts to document concentration focus on financial and real property assets and income flows and gloss over the contributions to income of human capital.
A Treasury economist and professors at Berkeley, Princeton and Chicago found most of the income accruing to top earners is that of entrepreneurs who are still actively managing their businesses—it’s mostly the return on their ideas and exceptional management skills.
Once ownership and control transfer to heirs and professional managers, income and businesses eventually decline. A recent American Institute for Economic Research study found that the share of income going to the 10% of earners has hardly varied from its average over the last century by more than 5 percentage points.
Even now Jeff Bezos only owns 16% of Amazon—and his pending divorce could cut that in half. Those who fear Amazon will eventually run everything should consider that Sears once built homes and sold automobiles.
All businesses have limited scope—the critical idea, product or management process reaches market saturation as Apple’s AAPL, +2.46% iPhone is now demonstrating. The founders, heirs or stewards of their wealth look for other businesses to invest but eventually lose interest or don’t do well.
Obsolescence kills businesses—soon Sears and likely Macy’s.
Contemporary entrepreneurs throw their weight around in politics but that is nothing new. George Washington was among the richest men in the largest colony and got appointed commander-in-chief of the Continental Army after a mediocre record in the French and Indian War.
These days most “dark money” goes to liberals and progressives, not Republicans, the alleged party of wealth. Do Democrats really want to destroy the billionaires who bankroll their movement?
Warren says her wealth tax would yield about $275 billion annually but history teaches wealth has quicker feet than the IRS. A good measure of it will move offshore in the wake of such foolishness.
What revenue is actually gained will be squandered. California and New York City have among the highest local taxes and the former abounds with potholed roadsand the latter sports a wretched subway system.
No doubt, if Warren or another wealth thrasher wins the Democratic nomination, Michael Bloomberg and Bezos will put their media machines and money behind them. And if their candidate proves successful then do as Fred Trump did—find creative trusts and other vehicles to make certain smaller entrepreneurs and not their heirs ultimately pay those taxes.