Last week, Jeff Bezos apparently made $20 billion as Amazon stock surged. The same day, Mark Zuckerberg lost $29 billion as Facebook plunged.
When combined, these two events tell us why trying to tax unrealized or nominal wealth isn’t going to work. Such a system in this limited case would just have made a tax revenue loss. This doesn’t seem to stop those with a voracious hunger for ever more tax revenue, though.
Standard economics tells us that we don’t want to tax capital, nor even the returns to it. The application of capital is called investment, and that’s what makes the future richer than today — why would we want to tax people doing that for us? It’s possible to dive into more detail and think that perhaps we do want to tax those who merely inherit wealth or those who live off economic rents and the like. But even when we delve into that detail, the one group we really don’t want to tax are the entrepreneurs, those who make that future richer for our children.
The examples offered from Oxfam through to Sen. Elizabeth Warren of whom to tax more are the Zuckerbergs, Bezoses, Bill Gateses, and so on. Namely, the very entrepreneurs that standard theory tells us we don’t want to tax. The argument given is that they’ve got so much that we must tax them. To which the standard theory says they’ve got so much because they’ve done so much for the rest of us. More importantly, why would we want to reduce the incentives to the next person bearing a gift of trillions in value to us as consumers?
Some proposals go so far as to insist upon taxing just that sort of stockholding wealth at the top. If Bezos makes $20 billion, then some of that, whether he sells stock or not, should be paid in tax. But any system that does that, taxes unrealized profits, must also offer refunds for unrealized losses, which means, in our little real-world example, that the Zuckerberg refund would be larger than the Bezos collection. A tax that not only goes against standard theory but also manages to lose tax revenue doesn’t really have much going for it!
This is not an isolated incident, either. Stock markets do bounce up and down. The S&P fell 30% as COVID-19 spread and lockdowns started: February to March 2020. About a $6 trillion loss, in fact. Care to pick the tax refunds out of that?
The truth is that some simply see large piles of money and would like to be spending some of that. They argue it should be taxed so they can do so, even in defiance of standard economic theory or even good sense. Economics is indeed a science. That standard tax theory is called “optimal tax theory,” and it gained a Nobel for its creator, James Mirrlees.
Let’s remember that.
