Why We Should Not Raise Taxes on the Super-Rich

Original post

In my last column, we discussed the super-rich… and how they got that way.

I ended by asking whether the federal government ought to tax these individuals more heavily for reasons of fairness.

Lanny Ebenstein, the political scientist and author I debated in Las Vegas last week, said, “Yes.”

I was left with a yeoman’s task: arguing against raising taxes on the uber-wealthy.

Look, no one reading this is passionate about competitive tax rates for billionaires. I get that.

But let’s keep a few things in mind.

First, it simply isn’t true, as some insist, that the middle class pays most of the country’s income taxes. According to the IRS, the top 4.5% of income earners pay 59% of all income taxes.

The top 1% pay more than 38%. The top 0.01% alone pay more than 20%.

This is as it should be. The rich make most of the money. They should pay most of the taxes. No argument here.

The question is whether we should soak them far more thoroughly.

I’d argue perhaps not.

In his famous book The Fatal Conceit: The Errors of Socialism, economist and political philosopher Friedrich Hayek warned that we cannot always – some would say ever – predict the outcome of new government policies.

It seems straightforward to some that if you raise the top tax rates then billionaires will pay more taxes.

Experience argues otherwise.

Raising rates could easily have the opposite effect, as high net worth individuals strive to reduce those liabilities through shelters, tax dodges, accounting tricks, offshore havens and less productive activities.

In fact, countries that raise rates on high earners often see them flee.

As a music-loving kid, for example, I always wondered what it meant when I read that the Stones and the Beatles were “tax exiles.”

As Keith Richards noted in his recent memoir, Britain’s top tax rate was 83% in the ’70s. “There is no difference between a tax rate that high,” he said, “and being told to leave the country.”

And so the Stones did, leaving Britain to collect 83% of nothing.

The same thing happens in high-tax states today. I know a lot of high-income earners who used to live in California, home to the nation’s highest top marginal state income tax: 13.3%.

Many of them are now residents of Texas, Florida or Nevada. All have no state income tax.

It’s true that billionaires have more money than they need. A net worth of nine figures or more is so large that spending it all is hardly even an option.

There simply aren’t that many yachts, private planes and professional sports franchises.

However, they can still invest their money.

Investment drives innovation, improves efficiencies, creates jobs, generates tax revenues and, not incidentally, allows us to meet all our economic wants and needs.

We want the tax code to incentivize entrepreneurs to start new businesses or expand existing ones.

Remember that rich people – think about this – are already rich. They don’t have to take investment risks if they don’t want to. Especially since that entails the possibility of loss.

Do we want to discourage billionaires from making investments that benefit us in so many ways – from safer transportation to cleaner energy to lifesaving drugs and medical devices?

Of course, spending and investing aren’t the only things billionaires can do with their money. They can also give it away.

Today’s uber-wealthy are… and at the fastest pace in history.

For example, Facebook founder Mark Zuckerberg and his wife, Priscilla Chan, are giving away 99% of their Facebook shares during their lifetime, currently valued at more than $50 billion.

They don’t just want to improve health in the developing world. They are using their foundation to help “cure, prevent or manage all diseases by the end of the century.”

The Bill & Melinda Gates Foundation is the biggest private foundation in the country, granting more than $4.6 billion in 2016.

The foundation has spent billions to reduce the spread of infectious diseases and malaria. It also has goals to improve education, reduce tobacco use, combat HIV and increase vaccinations in the developing world.

These are hardly isolated examples. This country has a long history of wealthy individuals exhibiting what I call “radical generosity.”

Steel magnate Andrew Carnegie established the Carnegie Corporation of New York, a foundation “to promote the advancement and diffusion of knowledge and understanding.” It has funded public libraries and universities across Scotland and the U.S.

Henry Ford left the bulk of his fortune to the Ford Foundation. In 2017, it granted more than $800 million for community and economic development, education, arts and culture, and human rights.

The W.K. Kellogg Foundation, funded by the breakfast cereal pioneer, donates hundreds of millions annually to promote education and healthcare for the poor.

David Packard, founder of Hewlett-Packard, set up the David and Lucile Packard Foundation to build community hospitals across the nation.

Intel founder Gordon Moore has given hundreds of millions to conservation groups and universities.

Standard Oil founder John Rockefeller gave birth to Rockefeller University and through his foundation established the first schools of public health, developed the vaccine for yellow fever and funded agricultural development around the world.

If the government had simply taxed away these fortunes and redistributed them, we’d have a lot more Americans driving gas-guzzling SUVs and watching ultra HDTVs, but that wouldn’t have been nearly as beneficial.

Philanthropists are far more accountable than government bureaucrats.

Politicians don’t earn our tax money. And – aside from wanting certain special interest groups to benefit from it – they aren’t terribly concerned about how it gets spent.

Fifty years (and $22 trillion) after President Lyndon Johnson’s so-called War on Poverty began in 1964, for example, the same percentage of Americans – 14.5% – were living in poverty.

Many argue that government programs designed to end poverty actually subsidize it, as we now have third-generation welfare recipients.

Entrepreneurs, on the other hand, care deeply about how their money is used and whether their giving is effective.

They didn’t confiscate their money. They earned it. And they don’t want to see it wasted.

Finally, if you think the outsized fortunes of America’s billionaires are an outrage, consider this.

Less than a hundred years ago, the richest man in America – John D. Rockefeller – could have whipped out his personal checkbook and paid off every dollar of federal debt that had accumulated since the country’s founding in 1776.

Yet today Uncle Sam could confiscate the entire $141 billion net worth of the country’s richest man – Jeff Bezos – and it wouldn’t cover six months’ interest on the debt.

(And just wait until interest rates normalize.)

In short, I don’t expect you to lose any sleep worrying about what Oprah Winfrey or Larry Ellison will pay in taxes this year.

But if you want to get riled up about something, consider not the billions earned by successful entrepreneurs but the trillions spent by irresponsible politicians.

Good investing,

Alex