The Biden administration is proposing a new tax on households worth more than $100 million. Tagged as a billionaire tax, the new levy would apply not just to ordinary income but also to unrealized capital gains. If a wealthy person owns shares of stock, and the stock is worth more today than when it was purchased, President Joe Biden wants the federal government to take 20% of the increase.
Whats wrong with that?
Many things. But the worst offense is the failure to understand the role of capital in the economy. From the point of view of pure self-interest, what matters to you and me is not how much wealth other people have but what they do with their wealth. Ordinary wage-earners tend to imagine that if they came into a great deal of wealth, they would be living in mansions, flying around in private jets, and sailing the seas in yachts.
There is plenty of that to go around. But many very wealthy people live very modest lifestyles. Sam Walton (founder of Walmart) was often seen sporting blue jeans and driving an old pickup truck. Warren Buffett never pays more than $3.17 for breakfast. Although he apparently spends some time in a mansion or two, Elon Musk has a primary residence that is a foldable, prefabricated rental house, the size of a studio apartment.
Heres why you should care. When Warren Buffett pays for breakfast (whatever the amount), he is benefiting Warren Buffett. When he invests in the capital market, he is benefiting you and me. Capital is what makes labor more productive, and more productive workers earn higher wages. Wherever we look in the world, we find that the more capital there is, the higher the average wage.
By contrast, taxing unrealized capital income and using the proceeds to subsidize consumption (which is basically what the Biden budget does) is a formula for reduced growth, lower wages, and smaller incomes for the average family. That is why my colleagues and I, along with many other economists, have long preferred a consumption tax. Lets tax Buffett and others based on what they take out of the economy (for themselves) and not on what they put into the economy (benefiting all the rest of us).
Replacing our current tax system with a consumption tax, especially a progressive consumption tax, has a lot of support among economists. But it is not popular with politicians or voters. Beginning with President Ronald Reagan and right through the presidencies of George H.W. Bush, George W. Bush, and Donald Trump, every time the Republicans passed a major tax bill, they took more and more families in the bottom half of the income distribution off the tax rolls. As a result, the tax code has become more progressive over time.
Thats why the top 10% of taxpayers today pay more than 70% of all income taxes. Its also why the U.S. tax system is the most progressive in the world. Republicans have done a poor job of setting the record straight, however. There are other reasons to oppose the new Biden tax. It may be unconstitutional. It is so complicated it is probably unworkable. Following the pattern of past taxes on the rich, it will probably trickle down to everyone else by design.
But the main reason to oppose the tax is straightforward: Its not in our self-interest.