How do we deal with unsustainable spending and borrowing? The formula is simple: less spending—or more accurately less rapid increases in spending—and more revenue. But can we generate more revenue without suppressing economic growth, which is after all what will allow us to pay for government over the long term?
It’s very nearly a law of nature that if you tax something you’ll get less of it. Increase taxes on wages, and we’ll get a little less in the way of productive work. The same holds for capital gains and dividend taxes. Increases there will reduce productive investment. Neither outcome is good for economic growth, which again is the key (along with restrained spending) to our problem
Despair not, fellow citizens! Over particularly well-mixed martinis (dry, up, with a lemon twist), a friend and I came up with a solution. We need a wealth tax.
Thus our modest tax proposal: 1 percent on net worth from five million to twenty-five million dollars, 2 percent on net worth from twenty-five million to one hundred million, and 3 percent on net worth of one hundred million and above.
The wonderful thing about a wealth tax is that it won’t retard economic growth nearly as much as other tax increases. That’s because growth in the economy comes from present productive behavior (work) and educated bets about what sorts of investments will support (and profit from) future productive behavior. Contrast this with wealth, which strictly speaking is the legacy of past productive behavior. Faced with this tax, people can’t alter their behavior, because they’ve already earned and invested what they’ve earned and invested.
We debated this point extensively over our second round of martinis. Viewed economically, a wealth tax will function a little bit like an increase in the top income tax rate, because it will mean that over time high earners keep a little less of their lifetime earnings as savings. That might mean a bit more spending rather than saving by high earners, which could be good or bad depending on how one views the relations between consumer spending and growth (two economists, three opinions). A wealth tax will also be somewhat like an increase in the capital gains tax, though it will have the advantage of not favoring or disfavoring any particular investment strategy or security, which will likely make for more efficient markets.
Then there’s the question of justice, which is prominent in President Obama’s way of thinking about these things, and rightly so. Where he goes wrong, however, is in failing to see the whole picture. Why should those aspiring to wealth—those high earners or Internet entrepreneurs waiting to cash out their stock option—be so much more heavily taxed than those who are already wealthy?
We were well into our second round of martinis when we come up with this scenario. Imagine a sixty-year-old retired investment banker. He has half his net worth of one hundred million dollars in municipal bonds (the income is tax free), and the other half he has invested with Berkshire Hathaway, Warren Buffet’s company, which pays no dividends, and thus generates no tax liabilities. Where’s the justice in that?
Compare this to the thirty-five-year-old investment banker who is trying to become wealthy. Of course he should pay a good chunk in taxes. He’s benefiting from a society and system that we’re all cooperating to sustain. But when it comes to resources, status, and the ability to throw his weight around in politics, he can’t compare with the guy who is already wealthy. Again, where’s the justice in that? Why put ankle weights on the guy running hard to get rich, when we’re letting the super-rich run free?
When the third round of martinis arrived, my friend pointed out that a wealth tax runs afoul with the Takings Clause of the Constitution. He was somewhat shocked that I was nonplussed. “The solution is obvious,” I pointed out. “Although we’ve been using the word ‘tax’ to talk about a wealth tax, Justice Roberts will certainly see that we don’t mean tax at all. Our modest proposal is really for a wealth user fee.”
The wealthy are very heavy users of the economic system, I explained, what with their complex involvement in capital markets and so forth. It makes perfect sense to charge them a user fee to compensate society as a whole for the costs of maintaining the capitalist system. Therefore, the wealth tax is no more a “taking” than having tollbooths at the entrance to the Lincoln Tunnel!
“Maybe,” said my friend, slightly slurring his words, “but I’ve got a better idea.” I can’t begin to rehearse the subtlety and nuance of my friend’s analysis, but it had to do with the way in which the very solvency of our country depends on the proper stewardship of the vast wealth that has been accumulated, invested, and reinvested over the decades. “That needs to continue!” he urged, “As anyone can see, we’re facing a systemic risk here. The super-wealthy are too rich to fail!”
Thus he proposed new regulations. The wealthy must meet basic capital requirements, say 1 percent of net worth from five million to twenty-five million dollars, 2 percent from twenty million to one-hundred million, and 3 percent for one-hundred million and above. This capital must be invested in super-safe U.S. Treasury bonds issued especially for this purpose. These bonds will be of indefinite duration, and they will pay no interest. To completely insure safety, and to make sure that Congress doesn’t meddle with these assets, covertly turning the capital requirements into a hidden tax, they will be put into the Social Security lock box.
I was overawed by the brilliance of this solution, which was at once entirely absurd and completely plausible. I raised my glass. “You, my friend, are ready for political office.”
R.R. Reno is Editor of First Things. He is the general editor of the Brazos Theological Commentary on the Bible and author of the volume on Genesis. His previous “On the Square” articles can be found here.