McHugh David: Wealth tax isn’t the answer – but incentivized investment could be

Two economic professors from Rice University recently released a book called the ‘Economic Effects of Wealth Taxes.’

John Diamond and George Zodrow posit that wealth taxes would actually shrink the economy by a substantial amount and cause more problems than it would solve.

An excerpt from a review of the book sums up their theory:

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In “The Economic Effects of Wealth Taxes,” authors John Diamond and George Zodrow, both Rice University economics professors, estimate that a 2 percent annual tax on household wealth above $50 million and a 6 percent tax on household wealth over $1 billion would cause a long-run GDP decline of roughly 2.7 percent in the size of the economy over the next 50 years. This translates to trillions of dollars in wealth that would never be realized or invested, they argue.

Taxing the wealthiest Americans in such a way would create a ripple effect, they conclude, resulting in an immediate loss in hours worked of 1.1 percent, or a loss of approximately 1.8 million jobs, and a long-term loss in hours worked of 1.5 percent.

They estimate a wealth tax would also cause an initial decline in average annual household real wage income of roughly $2,500 and spike the welfare state’s growth by 70 percent.

Per-household wealth held by the top 0.25 percent of Americans would fall by $3.7 million, they estimate, and in lower-middle and upper-middle class households, declines in lifetime wealth would range from between $440 and $49,660.

For sake of brevity, and argument, let’s just say that the two professors are correct on at least their base premise – that taxation of the wealthy would lead to economic downturns.

It makes sense, from a pragmatic point of view, because it’s counter to how those individuals and families achieved such wealth. Capitalism is based on profit and accumulating capital. The best of the best tend to have maximized their ability to play the game and end up with more money than the rest of us can count.

They also tend to be pretty good with numbers, so when the word ‘tax’ gets thrown out the immediate thought from wealthy individuals, families, and businesses is ‘cut to compensate.’

The professors argue that would be in the form of jobs, and to a lesser extent expenditures – both combine to regress the economy.

So, knowing that the wealthy have – for the most part – worked hard to build their money and are very… touchy about taxes, is there some sort of solution? As mentioned, these businesses, families, and individuals are very good at creating and capturing capital, so can we truly take it away?

The answer to that question is yes, but why would the country want to? Inflation, that’s why.

As the super-wealthy continue to pull money out of the economy individuals in the middle and lower class become more-and-more reliant on credit, because the country can’t just turn the money machine on and run it until things are balanced again – it devalues the dollar, drives up interest rates, and creates inflation.

But what of investment? After the most recent tax cut legislation under President Donald Trump, a program was created looking to inspire investment in low-income areas to try and create real estate and business opportunities. Unfortunately, the program took years to roll out and was a complicated, burdensome process that never really panned.

But a pivot could work, toward private investment in public works. The immediate reaction from many is, ‘government can’t be trusted!’

Sure, that’s why the system would be set up like today’s grants. Right now, most state and local governments are heavily reliant on grants from the feds or charitable donations to make the sausage work.

Yes, most government finances are unsustainable at present, you read that correctly.

So why not let local governments apply to wealthy foundations for improvements? For state and local governments, its a way to get that extra cash to take on those projects that may be essential, but unaffordable. Upgrades to roads, bridgegs, utility infrastructure – all could be acquired through private investment.

Accounting-wise, it would be reported, just like grants.

For the wealthy? A tax break. ‘But,’ you might say, ‘the wealthy have so many tax breaks!’

This is true, but many of those breaks are what prevent government from keeping up with basic maintenance and regular upgrades to better serve citizens.

The tax code at that level would have to be restructured in such a way where some breaks that were non-government or non-charitable were no longer deductible, there has to be incentive, but there’s wiggle room in the tax code to make it appealing for the wealthy without them pushing back, legislatively.

Because investment in local infrastructure could cut a huge burden from local and state governments – allowing them to focus on other, smaller projects instead of having to save up to just to do the big ones.

McHugh David is publisher of the Livingston Parish News.