Not a Very Virtuous Virtue Signal

As reported by Reason, a group including about 250 million- and billionaires calling themselves Proud to Pay More (P2PM) advocated the imposition of wealth taxes in an open letter to the “luminaries” meeting in Davos, Switzerland. Its core is apparent from the following excerpt: 

Our request is simple: we ask you to tax us, the very richest in society. This will not fundamentally alter our standard of living, nor deprive our children, nor harm our nations’ economic growth. But it will turn extreme and unproductive private wealth into an investment for our common democratic future. 

The solution to this cannot be found in one-off donations or in philanthropy; individual action cannot redress the current colossal imbalance. We need our governments and our leaders to lead. And so we come to you again with the urgent request that you act — unilaterally at the national level, and together on the international stage.

The open letter is full of self-righteousness disguised as reasonableness. But you don’t need to look very hard to find serious questions that seem to escape their notice.

The letter represents the views of a minuscule fraction of “the rich,” so that what they are really advocating is forcing far larger numbers of those who disagree with them about that “need” to pay most of the bill for what they want governments to do. In other words, the coerced charity its signatories want to impose means a more accurate name for their group would be Proud to Make Others Pay Most of the Tab. But that does not send a very virtuous virtue signal.

The letter claims hefty wealth taxes, in addition to the host of current taxes, will not harm economic growth. Where is the defensible evidence? It is in fact on the other side. Wealth taxes have been tried before, to little success, and often abandoned for ineffectiveness. That is not surprising, either, since they rely on the claim that incentives don’t matter, not just to the taxed productive efforts, but those of others. Who really believes that? Being able to keep more of the gains produced gives even rich people more incentive to use their sizable assets to benefit others. If you ignore the rich, and focus on the wellbeing of everyone else (which takes envy out of consideration) you’ll find that the wealthy do more for others when they face lower taxes. Further, we must remember that wealth taxes don’t only fall on the currently wealthy, but reduce the productive incentives of those seeking to become wealthy by doing better for others.

In addition, the imposition of a wealth tax would be far more burdensome, reducing productive incentives more than it appears. Someone with $100 million in taxable wealth would pay $2 million in taxes each year with a 2-percent rate, which would total $20 million — 20 percent of that $100 million, not 2 percent — over a decade.

That hefty burden is on top of all other taxes, as well. And the disincentive effects of taxation result from the cumulative marginal tax rates of all the different taxes put together. In fact, a standard result of the public finance literature is that the welfare cost of taxation (the joint gains from trade eliminated when higher taxes eliminate more of those trades) in the simplest case is proportional to the square of the cumulative marginal tax rate. 

P2PM calls private wealth “unproductive,” but implies that if such wealth were put under government control, it would be transformed into “an investment.” But people don’t build or maintain their wealth by swimming in gold coins like Scrooge McDuck. They do it by continuing to use that wealth to produce goods and services others value enough to pay for (or providing the resources to finance others who do so). Calling the extraction of resources from one group to give to others an investment, rather than wealth redistribution that reduces others claims on their own property, is a massive misrepresentation. P2PM’s complete lack of serious consideration of the other end of that redistribution — real world government operations and effects, including the costs of fraud, waste, inefficiency and corruption — also shows their utopian view as fantasy.

The wealthy are free to use their resources to advance the general welfare in any way that doesn’t violate others’ rights. Many are even subsidized in doing so by the tax deductibility of charity. They can also work together toward common goals as they wish. Given that a wealth tax is impossible to administer effectively, efficiently, or equitably, P2PM members could do a lot more good (and less bad) by giving their own money themselves, without giving government massive new taxing powers and creating more avenues for unfair treatment of taxpayers. They invite trouble not only for themselves, but others, as once a wealth tax is in place, nothing precludes our financially irresponsible government from jacking up the rate, nor indeed from extending it to the middle class, given bank robber Slick Willie Sutton’s insight that “that’s where the money is.”  

P2PM’s letter excuses its signatories from dealing with such issues by defining the projects they have in mind as “too big” for individual action, and thus requiring government action (read: the application of coercive power to citizens to make them do what they would not choose for themselves). While the application of coercive power is government’s comparative advantage — its only one to my mind, given that we know ourselves better and care about our own wellbeing more than government can —it is hard to imagine how we all gain from coercively making us do what few would choose to do for themselves.

These letter-writers’ claim seems to be more of an excuse than a real reason. It is like saying “I really care about eliminating poverty. But the problem of poverty exceeds my resources to eliminate it. That’s why I don’t give to those I could help with the resources at my disposal,” but with more zeroes at the end of that rationalization than would be the case for you or me. It seems to require that they care about “poverty” in an abstract way, but not enough about poor people to help them when they could. It seems that for P2PM members’ assertions of how much they care to be credible, they must already be giving more to good causes than the amount they are volunteering to raise their own taxes. 

We should also consider how many times over how many years members of the “tax me more” crowd have repeated the same claims, and basked in their own and others’ approval for their selflessness, without actually giving up their wealth to do so. It may be that what many are actually doing is “buying” more self- and mutual-approval on the cheap, by proclaiming to support something they have not and likely never will have to make good on.

Perhaps they are aiming even higher, intending to eliminate scarcity. But that is insufficient to justify their proposals, because as anyone who has sat in a credible principles of economics course for a week knows, that is just as impossible for government to do as for anyone else. 

A careful reading of P2PM’s manifesto turns up far more problems and issues than just the two short paragraphs discussed here. But these are more than enough to place a very heavy burden of proof on those advocates before they are taken seriously. Simply asserting questionable and false things and ignoring real problems does not justify acceptance by others, much less plaudits.

We must also remember that, as F.A. Harper put it in his Liberty: A Path to Its Recovery over a half-century ago, “The virtue of compassion and charity cannot be sired by the vice of thievery.” Consequently, “‘Political charity’ violates the essentials of charity…taken by force from the pockets of others…All told, the process of ‘political charity’ is about as complete a violation of the requisites of charity as can be conceived.”

Gary M. Galles

Gary M. Galles

Dr. Gary Galles is a Professor of Economics at Pepperdine.

His research focuses on public finance, public choice, the theory of the firm, the organization of industry and the role of liberty including the views of many classical liberals and America’s founders­.

His books include Pathways to Policy Failure, Faulty Premises, Faulty Policies, Apostle of Peace, and Lines of Liberty.

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