One way to sell a new tax is to do the hard work of proving that it’s a good idea. ‘There’s some problem that needs to be solved,’ ‘here is the solution’, sort of thing. Say, carbon emissions are bad, we should have a carbon tax. In the absence of any such evidence, it’s necessary to just shout that it’s fair. Which is what Gabriel Zucman is doing in his book ‘We Need To Tax Billionaires’. He’s not in fact giving us a reasoned argument at all. The book – well, it’s so short that it’s better described as a love letter to economic populism – is based upon no more than a cry of ‘not fair!’
And, you know, perhaps something so wildly contradicted by all the conventional forms of economics we have should need to meet a higher standard of proof than that?
For all my cynicism, that is really what is being done here. There is always a trade off between efficiency – how well the tax will achieve what we desire to be achieved – and equity – what the populist will demand as fair. If you cannot back up a tax proposal with one argument then use the other. The argument against taxing capital gains at the same rate as income is that, for all its seeming fairness, it’s inefficient. And so on – when you run out of one argument then lean heavily into the other.
The analysis done by Zucman contains nothing at all about efficiency. On the very useful grounds, for his argument, that there are no efficiency arguments in favour of a 2% wealth tax upon billionaires. We’ve gone through all of this, over the decades, including in the Nobel winning work on optimal taxation by Sir James Mirrlees. Despite those equity arguments, no, we should not tax stocks of wealth, we should not tax capital the same as income. The background to that efficiency argument being that we actually like capital. When it’s wisely invested it is the very thing that makes our own future richer. This is a good idea.
This is the standard analysis that Zucman needs to refute. Which he does by wholly ignoring it and instead turning to that perpetual teenage whine of ‘no fair’. As if we should build our economic system on the sayings of the Teenage Kevin.
In detail, Zucman notes that a detail of the French tax system allows those who use holding companies to accumulate dividends without paying tax upon them. If true, this might be a reason to resolve French tax law upon dividends and holding companies. But the assumed injustice – and it is, pretty much, the only one used – is then used to support that 2% wealth tax upon the holdings of billionaires.
At which point I interject a supposition, which is that once the principle of a wealth tax has been sold, then it will apply lower and lower down the income scale at ever higher rates. But perhaps that’s just me – despite the evidence of income and social security taxes over the past couple of centuries.
As the work of Mirrlees shows, a wealth tax is definitively rejected upon efficiency grounds. We like investment, thus taxing either the amount invested, or even the returns to investment is contraindicated. Money taken out to then consume becomes consumption or, to give it the other name, income, and that could be taxed as with all other incomes. This is how a general economic opinion has settled upon the progressive consumption tax as the best blend of that efficiency and equity we can achieve. All amounts invested, all made from having invested, is tax free, all used as income to be consumed is taxed at full whack – to give a pencil sketch of the idea. Another way to describe this would be that all investing is done in some giant self-invested personal pension, or 401(k) and only extractions from that are taxed as income at the usual progressive rates.
Zucman is clearly aware of this because his actual complaint becomes that the rich don’t consume all their earnings. True. So, they earn from their investments and – well, because they don’t consume it, therefore don’t pay income tax taking it out of their companies and so on then and therefore they reinvest that money. Which is horrible, they just invest without having paid income tax! The complaint is that very purpose, at least that getting close to the ideal system, whereby investment isn’t taxed and consumption is at progressive rates. Because we like people investing, it makes that future richer and so on.
Which is why the entire argument is posed as a fairness one. The billionaires get to reinvest what they don’t consume without paying consumption taxation – how unfair that is. Thus we must impose that worst of capital taxes, a wealth tax. That is, I’m sorry to have to say, really the nub of his argument. There is nothing here any more sophisticated than that.
To cast his argument in terms of economic efficiency it is that we should stop those provably good at investing – a useful definition of people making good investment returns – from reinvesting the returns to past investments and instead hand the money to politicians to urinate up the wall. No wonder he doesn’t even try an economic efficiency argument and only presents one from adolescent intimations of fairness.
I must admit to having been most amused by two comments he does make. Sadly, I don’t think he gets the joke here. In France ‘a ratio of tax to national income of 51%’ and ‘The government doesn’t burn its tax revenue’. I’m really truly uncertain that we should be taking tax advice from a man who thinks the first point doesn’t prove the second.
