More Thoughts on a Wealth Tax and Alternatives

April 30, 2020

(This post first appeared on my Patreon page.)

Last week the Boston Review (BR) published an exchange on a wealth tax that included a proposal from Berkeley economists Emmanuel Saez and Gabriel Zucman, with a number of responses, including one from me. I was critical of the proposal for both political reasons and because I think avoidance and evasion will be massive problems.

On the political side, in addition to the difficulty of getting a wealth tax through Congress, there is the virtual certainty that the current Supreme Court will rule it unconstitutional. This is not an abstract question of whether a wealth tax should be viewed as constitutional. I realize that many legal scholars have argued that such a tax is not inconsistent with the power to tax granted to Congress by the constitution. This is a very concrete question as to whether the current Supreme Court would rule that a wealth tax is constitutional. I don’t think anyone with a straight face could argue that it would.

We can of course talk about various plans to pack the court, either by adding new justices or through some rotation scheme of judges across federal courts. These may be interesting and worthwhile strategies to pursue against a corrupt court, but if we’re thinking of a timeline of a presidential term in which we hope to get important legislation passed, they are not likely to be helpful. 

Even if we can implement an effective strategy for ending the right-wing lock on the court, it is not likely to be quick enough to allow a measure like a wealth tax to be implemented in the same presidential term. If this is at the center of a progressive president’s agenda, they will have to find a way to get re-elected without passing this important measure. 

My other reason for objecting is that I think a wealth tax will prove very difficult to enforce. We have experience with income taxes and estate taxes. The enforcement of these is far from perfect, but at least the apparatus is in place. We would be starting from scratch with a wealth tax and the rich will have a very strong incentive to avoid or evade it. My guess is that they would be fairly successful, undermining the goal of the tax as well as confidence in the tax system. 

As I pointed in the BR piece, one foolproof mechanism for avoidance is renouncing citizenship. While Saez and Zucman have a 47 percent exit tax as part of their proposal, this would not apply to people who renounce their citizenship before the tax is enacted. In their response, Saez and Zucman suggest that the tax could be imposed even on those who have already left. While they have a good moral argument, as a practical matter, the probability of collecting large amounts of retroactive taxes from someone who has fled to a tax haven does not seem very high. 

Stopping Extreme Wealth at Its Source

While I don’t think a wealth tax is an effective mechanism to contain excessive wealth, I strongly agree with Saez and Zucman that it is a serious problem for both economic and political reasons. However, I have focused my own work on changing the economic structures that allow for the accumulation of extreme wealth. 

I won’t go through the whole story here (this is the point of Rigged [it’s free]), but the basic argument is that over the last four decades we have structured the economy in ways that allow for the accumulation of massive amounts of wealth. There is nothing inevitable about this structuring, we can structure the economy differently so that its benefits are more broadly shared instead of flowing so disproportionately to those at the top.  

My poster child for the impact of the structuring of the economy is Bill Gates. Gates is one of the richest people in the world because we have patent and copyright monopolies. If the government didn’t grant these monopolies, and anyone who wanted to could freely copy Microsoft’s software, Bill Gates would probably still be working for a living.

Patents and copyrights serve a purpose, they provide an incentive for innovation and creative work, but there are other ways to provide these incentives. And even if we decide to use patent and copyright monopolies, they could be shorter and weaker, so that they don’t redistribute so much income to their holders. 

The place where I have spent the most effort combatting these government-granted monopolies is with prescription drugs. This is both where they cause the greatest amount of corruption — think of the opioid crisis, a direct result of the incentive created by patent monopoly prices to push drugs — and where they lead to the most obscene outcomes: people being unable to afford cheap drugs because patent monopolies make them expensive.

The pandemic should provide a great opportunity to challenge patent monopolies in prescription drugs. There is an unprecedented amount of international cooperation, as well as public funding, in the efforts to develop treatments and an effective vaccine against the coronavirus. Given this collective effort, it would be utterly absurd to give the company that happened to be the first to the patent office a monopoly on a treatment or vaccine. 

The only sensible solution is that the drugs and vaccines that are developed through this collective effort be in the public domain so that they can be sold as cheap generics, where the price is the cost of manufacturing and distribution, and a normal profit. We should not be in the position of begging a patent holder to make a drug or vaccine available at an affordable price.

If we could go this route with the coronavirus then it should raise the obvious question of why this should not be the standard practice – publicly funded, open-source research with everything placed in the public domain. And, what is really neat about this approach is that we don’t even have to stop drug companies from pursuing patent-supported research. They would just face the risk that any drugs they do develop will face competition from a drug that is as good or better and selling as a generic at one percent of the price they planned to charge. That risk would likely shut down most patent-supported research very quickly.

The amount at stake here is enormous, as I continually point out. In the case of prescription drugs alone, it is close to $400 billion a year, roughly 20 percent of all corporate profits.

I could be wrong, but it strikes me as a far smaller political lift to say that the government should increase its funding for the development of prescription drugs (we already spend $40 billion a year through NIH), and have everything developed in the public domain, than imposing a wealth tax. And there is no issue of its constitutionality. 

As I point out in Rigged, there are also measures we can do to radically reduce the big fortunes built-in finance, most obviously by imposing a modest financial transaction tax. We can hugely reduce Mark Zuckerberg’s fortune by repealing Section 230 of the Communications Decency Act, thereby subjecting Facebook and other Internet intermediaries to the same legal liabilities as their competitors in traditional media. 

We don’t need to structure our economy in a way that leads to massive inequality. There has been a conscious choice made by those designing policy in the last four decades. Our top priority should be to change this design.

Leveling the Political Playing Field

Saez and Zucman are entirely correct in pointing out that the enormous amount of wealth at the top gives these people hugely outsized political influence. While this is true, we are not going to be able to easily reverse this, even with a wealth tax. Jeff Bezos and Bill Gates could still wield ridiculous amounts of political influence if we managed to tax away half of their wealth.

Our efforts can’t be focused just on bringing the top down, we have to bring everyone else up. Fortunately, there are models for doing this. Seattle gives every voter a $75 voucher to support the candidate(s) of their choice in city council elections. Several cities now have super-matches, where small campaign contributions are matched three or four to one. I have outlined a plan where everyone would have a $100 voucher to support journalism or any other creative work they choose.  

There are many other directions in which these sorts of proposals can be developed, but the point is that, with a relatively small amount of public funds, we can hugely democratize politics, as well as journalism and creative work more generally. Getting more input from those at the middle and bottom is likely to be a far more productive path towards counterbalancing the influence of the rich than trying to take away their money. And, this can be done piecemeal, one city or state at a time. 

Keeping Our Eye on the Ball

In contrast to the right, progressives get relatively few bites at the apple. The right can have a George W. Bush, who lied us into a pointless war in Iraq and then allowed the economy to collapse under his watch and then get back in control of the White House and both houses of Congress eight years later. If a progressive presidency had led to similar foreign policy and domestic disasters, the left could look forward to a half-century in the wilderness, maybe longer. 

For this reason, we have to make sure our bites at the apple are all good ones. A huge political battle for a wealth tax that ultimately ended in defeat in Congress or a loss at the Supreme Court would be a disaster. We need battles that are winnable and produce tangible near-term results. There are an infinite number of ways that we can turn to reverse the upward redistribution of the last four decades. This should be the focus of progressive economic policy. 

 
 
 
 

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