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Archive for October 3rd, 2019

I sometimes mock the New York Times for dodgy and inaccurate writing about economics.

Though, to be fair, the paper has many sound journalists who do a good job, so I should be more careful about explaining that the mistakes are the result of specific reporters and columnists.

Paul Krugman is an obvious example.

And we should add David Leonhardt to the list. He actually claims that imposing a wealth tax and confiscating private capital can lead to more growth.

There are two problems with the arguments from these opponents. First, they’re based on a premise that the American economy is doing just fine and we shouldn’t mess with success. …Second, …it’s also plausible that a wealth tax would accelerate economic growth. …A large portion of society’s resources are held by a tiny slice of people, who aren’t using the resources very efficiently. …Sure, it’s theoretically possible that some entrepreneurs and investors might work less hard… But it’s more likely that any such effect would be small — and more than outweighed by the return that the economy would get on the programs that a wealth tax would finance, like education, scientific research, infrastructure and more.

Wow. It’s rare to see so much inaccuracy in so few words.

Let’s review his arguments.

His first claim is utter nonsense. I’ve been following the debate over the wealth tax for years, and I’ve never run across a critic who argued that the wealth tax is a bad idea because the economy is “doing just fine.”

Instead, critics invariably explain that the tax is a bad idea because it would exacerbate the tax code’s bias against saving and investment and thus have a negative effect on jobs, wages, productivity, and competitiveness.

And those arguments are true and relevant whether the economy is booming, in a recession, or somewhere in between.

His second claim is equally absurd. He wants readers to believe that government spending is good for growth and that those benefits will more than offset the economic harm from the punitive tax.

To be fair, at least this is not a make-believe argument. Left-leaning bureaucracies such as the International Monetary Fund and Organization for Economic Cooperation and Development have been pushing this idea in recent years. They use phrases such as “resource mobilization” and “financing for development” to argue that higher taxes will lead to more growth because governments somehow will use money wisely.

Needless to say, that’s a preposterous, anti-empirical assertion. Especially when dealing with a tax that would do lots of damage on a per-dollar-collected basis.

Interestingly, a news report in the New York Times had a much more rational assessment, largely focusing on the degree of damage such a tax would cause.

Progressive Democrats are advocating the most drastic shift in tax policy in over a century as they look to redistribute wealth…with new taxes that could fundamentally reshape the United States economy. …Senators Elizabeth Warren of Massachusetts and Bernie Sanders of Vermont have proposed wealth taxes that would shrink the fortunes of the richest Americans. Their plans envision an enormous transfer of money from the wealthy… the idea of redistributing wealth by targeting billionaires is stirring fierce debates at the highest ranks of academia and business, with opponents arguing it would cripple economic growth, sap the motivation of entrepreneurs who aspire to be multimillionaires and set off a search for loopholes. …At a conference sponsored by the Brookings Institution in September, N. Gregory Mankiw, a Harvard economist, …offered a searing critique, arguing that a wealth tax would skew incentives that could alter when the superrich make investments, how they give to charity and even potentially spur a wave of divorces for tax purposes. He also noted that billionaires, with their legions of lawyers and accountants, have proven to be experts at gaming the system to avoid even the most onerous taxes. …“On the one hand it’s a bad policy, and then the other thing is it’s a feckless policy,” Mr. Mankiw said. Left-leaning economists have expressed their own doubts about a wealth tax. Earlier this year, Lawrence Summers, who was President Bill Clinton’s Treasury secretary, warned…that wealth taxes would sap innovation by putting new burdens on entrepreneurial businesses while they are starting up. In their view, a country with more millionaires is a sign of economic vibrancy.

This is an example of good reporting. It cited supporters and opponents and fairly represented their arguments.

Readers learn that the real debate is over the magnitude of economic harm.

Speaking of which, a Bloomberg column explains how much money might get siphoned from the private economy if a wealth tax is imposed.

Billionaires such as Jeff Bezos, Bill Gates and Warren Buffett could have collectively lost hundreds of billions of dollars in net worth over decades if presidential candidate Elizabeth Warren’s wealth tax plan had been in effect — and they had done nothing to avoid it. That’s according to calculations in a new paper by two French economists, who helped her devise the proposed tax on the wealthiest Americans. The top 15 richest Americans would have seen their net worth decline by more than half to $433.9 billion had Warren’s plan been in place since 1982, according to the paper by University of California, Berkeley professors Emmanuel Saez and Gabriel Zucman. …The calculations underscore how a wealth tax of just a few percentage points might erode fortunes over time.

Here’s the chart that accompanied the article.

What matters to the economy, though, is not the amount of wealth owned by individual entrepreneurs.

Instead, it’s the amount of saving and investment (i.e., the stock of capital) in the economy.

A wealth tax is bad news because it diverts capital from the private sector and transfers it to Washington where politicians will squander the funds (notwithstanding David Leonhardt’s fanciful hopes).

So I decided to edit the Bloomberg chart so that is gives us an idea of how the economy will be impacted.

The bottom line is that wealth taxation would be very harmful to America’s economy.

P.S. Several years ago, bureaucrats at the IMF tried to argue that a wealth tax wouldn’t damage growth if two impossible conditions were satisfied: 1) It was a total surprise, and 2) It was only imposed one time.

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