Why the Wealth Tax Is Anti-Biblical, Immoral, and Futile
One law shall be to him that is homeborn, and unto the stranger that sojourneth among you (Exodus 12:49).Ye shall do no unrighteousness in judgment: thou shalt not respect the person of the poor, nor honor the person of the mighty: but in righteousness shalt thou judge thy neighbour (Leviticus 19:15).
The principle of the rule of law is one of the most important legal foundations of Western civilization. It may be the most important legal foundation. I cannot think of any legal principle that is more fundamental to preserving liberty.
This legal underpinning of liberty rests on a principle of morality. That principle is this one: the defense of private property. The Bible is clear about this: "Thou shalt not steal (Exodus 20:15). It is one of the Ten Commandments. In what ways is related it to the wealth tax? In this way: when a majority of individuals who are not wealthy banded together to vote into law taxes that apply only to the wealthy, they are thieves. They are using the power of state violence to extract money from members of one income tax bracket in order to transfer that money to members of lower income tax brackets (minus 30% for handling). It is summarized in this brief poem:
Don't tax you.
Don't tax me.
Tax the guy behind the tree.
THE GRADUATED INCOME TAX
Fortunately for liberty in the United States, it has proven impossible for the United States government to generate extra tax revenues by taxing the rich at extortionate rates. The rate during World War II was 91%. That rate was maintained until the Johnson administration, when it was dropped to 70%. This 1964 law became known as the Kennedy tax cuts. Here is a chart that demonstrates that such levels of taxation did not increase the ratio of tax revenues to GDP.
The sharp increase of revenues that took place in 1944 was not the result of the imposition of the 91% bracket. It was the result of the federal government's adoption of income tax withholding. That was Milton Friedman's recommendation. He was a young economist working for the Treasury in 1943. Free market economist Robert Higgs has written about Friedman's support of the 1943 Tax act here.
Here is a chart and a table of the top and bottom tax rates from 1900. There was a marginal increase in the top bracket in 1944, from 88% to 94%. That was an increase of 7%. This cannot explain the sharp increase in 1944.
The chart and the table are posted here.
Let's go back to the original chart on the ratio between actual tax revenues and GDP. You will notice that there was no decrease in total tax revenues as a result of Johnson's decrease from 91% to 70% in 1964. There was also no decline in revenues as a result of Ronald Reagan's decrease from 70% to 28%. This makes it clear that the federal government is going to collect approximately the same revenue from the general public, whether or not income tax rates imposed on the rich are high or low.
The rich do not pay much income tax. That is because they take their income in the form of capital gains. Capital gains are taxed at a much lower rate. There are also other loopholes available to them.
THE WEALTH TAX
Promoters of the wealth tax recognize that the graduated income tax has failed to extract extra wealth from the rich. The rich keep getting richer. So, they propose a wealth tax. Wikipedia describes this proposal.
A wealth tax (also called a capital tax or equity tax) is a levy on the total value of personal assets, including: bank deposits, real estate, assets in insurance and pension plans, ownership of unincorporated businesses, financial securities, and personal trusts. Typically liabilities (primarily mortgages and other loans) are deducted, hence it is sometimes called a net wealth tax.A wealth tax taxes the accumulated stock of purchasing power, in contrast to income tax, which is a tax on the flow of assets (a change in stock).
The idea is inherently nutty. The wealth of the rich and the super-rich is held mostly in the form of capital: shares of ownership (stocks) in large productive enterprises that are the basis of modern mass production and mass wealth. These core assets generate income, but most of it is reinvested. This is the foundation of long-term economic growth, which makes us steadily richer.
If a wealth tax were imposed on them, meaning a one-time extraction of wealth, they would have to sell their stocks and bonds in order to pay the tax. They could not sell their stocks and bonds to other rich Americans, who would be selling their own capital. The stock market would drop like a stone, and long-term interest rates would soar, crashing the bond market. The only way to keep this from happening would be for super-rich Americans to sell their stocks and bonds to super-rich people outside the United States, who do not pay income taxes or wealth taxes to the federal government.
What is far more likely is that the rich would transfer of most of their wealth to private tax-exempt foundations in the year that the wealth tax is signed into law. They have been doing this for a century. They would not pay the wealth tax. They would be in control of foundations, deciding where the money is going to go. Here is how the system works.
If the promoters of the wealth tax do not understand this, then they are ignorant of both economics and the tax code. The two main promoters inside the beltway are Elizabeth Warren and Alexandra Ocasio-Cortez.
Then why would anyone who understands economics and the tax code promote this idea?
THE POLITICS OF ENVY
The wealth tax is popular, not because the promoters who understand expect to get their hands on the money extracted from the rich. Rather, they are driven by envy.
In 1966, the German sociologist Helmut Schoeck wrote a classic book, Envy: A Theory of Social Behavior. He argued that envy is the root cause of socialism and other forms of compulsory wealth redistribution.
Most people think the cause is jealousy. The jealous person says: “You’ve got something I want. I’m going to take it away from you.” Schoeck said this explanation misses the more intransigent underlying outlook: envy. “You’ve got something I want. I can never possess it. So, I’m going to destroy what you have. I don’t want anyone to have it until everyone can have it.”
Schoeck said that a jealous person can be bought off. He is willing to settle for a piece of the other person’s action. The envious person can’t be bought off. The fact that someone else is in a position to buy him off enrages him. His sin therefore is self-reinforcing.
Envy undergirds socialism, he argued. He therefore concluded that it is impossible to buy off hard-core socialists by offering to share a larger percentage of national wealth with them. They will not go away. They will demand all: complete equality. Will this undermine economic production? They don’t care. They are not jealous. They are envious.
Schoeck recognized that envy was one of the medieval church’s seven deadly sins. He believed that generations of preaching against envy was one of the pillars of Western economic growth — one that has not been widely recognized.
CONCLUSION
The wealth tax is not going to be passed into law. The superrich in the United States have avoided paying income taxes at high rates from the beginning of the income tax. They are influential. They support political action committees. The politicians know where their political bread is buttered.
Here is my favorite example: the carried interest tax. It is the greatest tax loophole for the super-rich. This is a good discussion of it. Amazingly, Donald Trump proposed getting rid of it. Who has always voted for it? Chuck Schumer. When Trump's tax package was passed by Congress in 2017, the carried interest tax was not removed.
The wealth tax is a pipe dream of liberals who do not understand how the tax code is reformed every so often. It is not reformed to force the super-rich to pay what liberals insist is "their fair share." The politics of fair share is immoral. I wrote about this in 1993. The promoters cannot follow the logic of economics. Here are the inevitable economic consequences of their proposal: (1) collapse the capital markets, or (2) the transfer America's capital to foreigners, or (3) the transfer most of the money to tax-exempt foundations.
Morally bad government policies produce economically bad results. I like to think of this as "Venezuela syndrome."