Wealth tax won’t fix it
In both my countries, America and France, there is a big debate going on about how to address out-of-control national debt. One idea that’s been bouncing around is an additional tax levied on large fortunes, beyond the top rate of the tax system. France used to levy the impôt sur les fortunes, the ISF or tax on fortunes. Emmanuel Macron’s government got rid of it.
In the US, cutting taxes has been Republican orthodoxy since well before Ronald Reagan, who presided over the largest tax cut in history, and then his adminstration had to backpedal to prevent a bankruptcy, with large tax increases. In the long run, little growth materialized from those cuts. Reagan’s administration also virtually tripled the national debt, from $995 million to $2.9 billion. (Today it is a terrifying 38.2 trillion.)
What are the effects of a wealth tax? Sounds good. There’s enormous and growing inequality in wealth in the United States, and can’t a small tax increase on “ultra-millionaires” help?
Actually, no. For instance, in 2012 François Hollande ran for president of France promising to tax the rich, whom he “hated”, he said. This in the country with practically the highest tax rates in the world, then and now. The result was that rich French people left, especially for Switzerland, which had promised them a full year of tax amnesty for becoming Swiss citizens. Tax revenue went down, not up.
A recent study of the Norwegian experience of wealth taxes explains why it sounds good, but isn’t. In particular, entrepreneurs tend to move out of the country, which leads to a drop in their productivity, which affects both business and personal tax revenue negatively. In other words, the wealth tax produces income to the government which is offset by decreases in tax revenues.
What is there to do? The US national debt is finally affecting confidence in the dollar, despite the American economy’s performance. The value to the nation of the US dollar is far more than just economic, but the reaction worldwide to the effects on the markets, as well as the sanctions and tariffs being imposed is finally pushing others to get rid of dependence on the dollar. “Soft power” is softening… Furthermore, the Trump administration’s tariff policies are increasing revenues by actually increasing taxes. I don’t why his supporters do not yet understand that they are going to make life even more expensive, not less—but they will.
To return to Senator Warren’s analysis, it is uncontestably true that the ratio of the very wealthy compared to “the rest of us” is economically and politically devastating—and it keeps growing. “Cornering the market” is what the ultra-wealthy do now, like the Mars family with pet products. With the promise to Elon Musk by his directors of a trillion-dollar bonus if he restores Tesla’s dominance, we could reach a level of wealth in one person’s hands that is incomprehensible. Except perhaps to Mr. Musk…
In the short term, Americans need to reinstitute a real graduated income tax, with many fewer tax loopholes like carried interest. And we need much better enforcement of tax law by the Internal Revenue Service. That means adding far more agents. Isn’t it obvious why the administration has cut 30% of the IRS workforce this year? Hmmm?
But in the long term, in both France and the United States, an economic policy designed to increase both wealth and a better distribution of it is lacking. With the control of Congress and the White House, the Republican Party sets economic policy, and it is headed for disaster, nationally and internationally. The Macron government on the other hand does not currently have the votes to set and maintain an economic policy, leaving crucial elements in the hands of populists of both Right and Left, such as reforming the pension system.
What economic policy should both countries pursue? One that is founded on a clear understanding of the real laws of economics. Too many people believe that an economy should reflect popular ideologies, such as Reaganomics, social democracy, communism and even national socialism. What really matters however is how governments and people adapt to those laws of economics, of production and consumption, of investment and outlay.
John Raymaker and I have tried to lay out the case for such an economic theory. So yes, I am pushing for interested people to read our book, Attentive, Intelligent, Rational, Responsible: Transforming Economics to Save the Planet. We don’t make any money on it. And it is not an easy read—sorry. But if you’ve followed my argument so far, you may want to see where it leads, and where it comes from.
From the Introduction:
Every human community has an economy. It is a simple matter of survival: in the short term, it provides daily food and shelter; in the long term, it provides for the next generation. We transform the resources provided by our planet into those necessities specific to our community. The climate crisis — the one that encompasses all the other crises we are facing — is the result of the ways we humans exploit the earth’s resources. In other words, our economies threaten the very survival that they should provide.
