"Socialists see unequal outcomes and ignore the process that created them.
"The interesting part isn't that some people got rich.
"It's that most of the richest people changed within a decade.
"Capitalism doesn't freeze society into classes. It constantly reshuffles them.
"The system they call unfair is one of the few that allows yesterday's winners to be overtaken by tomorrow's innovators."
~ Rock Chartrand
"[There's a] difference between wealth and consumption. The poor wish consumption. Turning capital into consumption must destroy the capital that produces consumption. Taxing wealth in the name of inequality will make the world, including the poor, much poorer. ...
"[T]he vision of high lifestyle amid destitution imagines great inequality of consumption. The current outrage, and demand for confiscatory taxation, is over inequality of wealth. (And that, largely mark-to-market wealth driven by high prices.) There is a big difference.
"The hard fact: Our billionaires, and now trillionaire, own wealth that is almost exclusively stock in companies they created. That wealth is almost entirely left reinvested in those companies. And the companies produce great products, innovate, and employ thousands. ...
"Musk’s trillion is not the ready inventory of a huge grocery store that can be handed out to feed people. And if it were, once the store was empty, the poor would be hungrier again, and there would be no store to buy from. ...
"The world’s rich consume very little of their wealth. The worlds’ poor consume a lot of whatever they have. Being poor is not fun. If we split up Musk’s $1 trillion and gave about $100 in Tesla stock to each of the world’s nearly 10 billion people, it’s a good bet they would not be content to consume only 1/10 of a cent extra per year.
"There are plenty of other reasons wealth taxation will not help. Even the billionaire’s wealth, even if it could be transferred and consumed without destroying the seed corn of our economy, is trivial. ...
"The biggest reason it will not work is the simple one: incentives. If you tax wealth, you tax the activities that create wealth. ...
"I too would love to raise the prosperity of the world’s poor. The goal is not the issue. The issue is whether the wealth tax will help or hurt.
"What helps? This graph from Max Roser at Ourworldindata makes the point beautifully..."
“But let me offer you my definition of social justice: I keep what I earn and you keep what you earn. Do you disagree? Well then tell me how much of what I earn belongs to you - and why?”~ Walter Williams, from his book All It Takes Is Guts: A Minority View
"... the political left has long had a remarkable lack of interest in how wealth is created. As far as they are concerned, wealth exists somehow and the only interesting question is how to redistribute it."~ Thomas Sowell from his 2002 book Controversial Essays
A gentle reminder for everyone: You may have a low-energy low-income country or a high-energy high-income country ---- but you will go a very long way to find any place with that link reversed.
It's a busy week. This week also marks the 250th anniversary of Adam Smith's Wealth of Nations, the first in-depth exploration and explanation of (in PJ O'Rourke's words) why some nations are prosperous and wealthy and other places just suck.In honour of the anniversary, here are several of Adam Smith’s most insightful observations:
It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages. [The Wealth Of Nations, Book I, Chapter II]It is the great multiplication of the productions of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people. [The Wealth Of Nations, Book I, Chapter I]
Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things. [Lecture in 1755, quoted in Dugald Stewart, Account Of The Life And Writings Of Adam Smith LLD, Section IV, 25]
By means of glasses, hotbeds, and hotwalls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and burgundy in Scotland? [The Wealth Of Nations, Book IV, Chapter II]Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer. [The Wealth Of Nations, Book IV Chapter VIII]
People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices…. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies, much less to render them necessary. [The Wealth Of Nations, Book IV Chapter VIII]To widen the market and to narrow the competition, is always the interest of the dealers…The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution... It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it. [The Wealth Of Nations, Book I, Chapter XI]
It is the highest impertinence and presumption… in kings and ministers, to pretend to watch over the economy of private people, and to restrain their expense... They are themselves always, and without any exception, the greatest spendthrifts in the society. [The Wealth Of Nations, Book II, Chapter III]There is no art which one government sooner learns of another than that of draining money from the pockets of the people. [The Wealth Of Nations, Book V Chapter II Part II]
Every individual... neither intends to promote the public interest, nor knows how much he is promoting it... he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.What improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. [The Wealth Of Nations, Book I Chapter VIII]
Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. [The Wealth Of Nations, Book IV, Chapter II]
The man of system…is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it… He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it. [The Theory Of Moral Sentiments, Part VI, Section II, Chapter II]Mercy to the guilty is cruelty to the innocent. [From his 1759 work, The Theory of Moral Sentiments]
Watch any rant by Chloe Swarbrick and, after the obligatory nods to te reo, to Palestine, and to passing laws to change the weather, she'll tell you that it's time for "the wealthy" to fund everything every government could dream of.
It's really the only substantive policy she can articulate. Yet she remains blithely unaware that the fortunes she want to sack are not gold bars under the mattress but ownership stakes in operating companies, real estate, and other productive assets, so her Wealth Tax would function as a direct penalty on those investments. That penalty doesn’t remain confined to the wealthy. Capital formation is what drives productivity growth and wage gains, and policies that discourage it ultimately leave everyone worse off.
As Adam Michel explains in this Guest Post, the chronic government spending growth she advocates cannot be paid for by ever more aggressive taxes on a narrow subset of high-income taxpayers. Not even in a US more stocked with billionaires than she'll ever see here ...
Wealth taxes are back in the policy conversation— a good opportunity to review how wealth taxes work and why they have been called “one of the most harmful taxes ever created.”
Wealth taxes are unique in that they are not levied on an annual flow of income or consumption (like a sales tax). Instead, wealth taxes apply to a stock of assets and are usually intended to be primarily redistributive, aiming to reverse a perceived inequality in the distribution of resources.
Wealth taxes promise redistribution but more often deliver high economic costs, administrative complexity, and disappointing revenue. California’s proposal to impose a broad-based wealth tax on the state’s billionaires illustrates how these taxes distort investment decisions, magnify fiscal volatility, and tend to evolve from one-time levies into permanent features of strained budgets.
Wealth Taxes In the Real World
Wealth taxes impose an additional layer of tax on the income generated by the underlying asset. Most wealth consists of productive assets deployed in the economy, such as active businesses and other physical investments. The annual income streams generated by the underlying assets—capital gains, dividends, and interest—are taxed through the normal income tax system.
The existing tax system already charges the wealthiest Americans high tax rates. A Biden administration Treasury study found that the wealthiest 92 Americans faced total state, local, federal, and international income tax rates of 59 percent. Recent research by four prominent liberal economists concludes that US billionaires pay higher tax rates than their counterparts in the Netherlands, Sweden, Norway, and France, and, contrary to the headline claim, the wealthiest taxpayers also pay the highest tax rates among all Americans.
Because wealth taxes are assessed on a stock instead of an annual income flow, expressing the tax rate as an equivalent income tax rate is more informative. Unless the taxpayer is expected to slowly sell off their underlying assets, the tax will be paid from annual income. Table 1 shows the equivalent income tax rate on underlying assets with different rates of return at different wealth tax rates. At the California top wealth tax rate of 5 percent, any asset earning less than a 5 percent annual pre-tax return would face income tax rates above 100 percent before paying other taxes. Bernie Sanders’ 2020 campaign proposal included a top wealth tax rate of 8 percent.
Net wealth taxes have been tested in other countries and repealed due to high economic costs and administrative burdens. Peaking at 12 in the 1990s, only four Organisation for Economic Co-operation and Development (OECD) countries still impose broad-based net wealth taxes today: Colombia, Norway, Spain, and Switzerland. The figure below shows the trend of wealth taxes over time.
Economic and Administrative Costs
Wealth taxes can impose confiscatory effective tax rates with predictable economic consequences. By directly reducing the after-tax return to saving and investment, they weaken incentives to build businesses, expand productive capacity, and take entrepreneurial risks. Because most large fortunes are not gold bars under the mattress but ownership stakes in operating companies, real estate, and other productive assets, a wealth tax functions as a direct penalty on those investments. That penalty doesn’t remain confined to the wealthy. Capital formation is what drives productivity growth and wage gains, and policies that discourage it ultimately leave everyone worse off.
Wealth taxes also distort capital allocation. Investors have a strong incentive to shift portfolios toward assets that are harder to value, easier to shelter, or more mobile across borders, rather than toward their most productive use. This encourages tax avoidance rather than genuine economic activity. It can mean less investment in long-term projects, more leverage, and greater reliance on complex financial arrangements to reduce reported net worth.
Wealth taxes are also administratively complex. Valuing a broad range of assets every year is extraordinarily difficult. Unlike easy-to-value publicly traded stocks, most wealth is tied up in closely held businesses, partnerships, real estate, artwork, and other illiquid or unique assets. Annual valuation invites avoidance and disputes, which raises compliance costs for both governments and taxpayers. It took 12 years for the IRS and the Michael Jackson estate to reach a court-mediated agreement on the value of its taxable assets. Going through such a process every year for all taxpayers with assets above or near the tax threshold is administratively impracticable.
Because of persistent administrative difficulties and taxpayers’ behavioural responses, wealth taxes raise comparatively little revenue. Countries that experiment with wealth taxes repeatedly find that taxpayers adjust their behaviour or move in large numbers, undermining optimistic revenue forecasts. Before France repealed its net wealth tax in 2018, the government estimated that “some 10,000 people with 35 billion euros worth of assets left in the past 15 years.”
Spain experienced a similar behavioural response following the 2023 “solidarity tax,” which raised just 40 percent of the projected revenue. Cato’s Chris Edwards summarises that “European wealth taxes typically raised only about 0.2 percent of GDP in revenues. Given the little revenue raised, it is not surprising that they had ‘little effect on wealth distribution,’ as one study noted.”
California’s Proposal Is a Warning for the Country
California’s proposed 5 percent wealth tax is especially notable because it would layer on top of the most progressive tax system in the OECD. The state already relies on taxpayers making over half a million dollars a year (the highest income 2.5 percent) to pay 49 percent of income tax revenue. They do this by combining high marginal income tax rates and heavy reliance on capital gains taxation, which makes revenues volatile and highly sensitive to the fortunes and domiciling decisions of a small number of taxpayers.
The initiative’s own findings make clear that this will not be a one-time tax. The ballot text explains that the wealth tax “would only modestly slow” the growth of billionaires’ fortunes in California. That admission undermines the premise that the tax solves any underlying fiscal or wealth distribution problem. If a tax leaves wealth largely intact, political pressure to repeat, expand, or permanently extend it is inevitable. This is what happened in Spain, when its “exceptional and temporary” wealth tax became permanent. California’s proposal should be understood in this light, not as a one-off correction, but as a test case for permanent wealth confiscation.
The lesson extends beyond California. Chronic spending growth cannot be solved by ever more aggressive taxes on a narrow subset of high-income taxpayers. Wealth taxes are not a solution to budgetary or economic gaps; they are a symptom of a broken fiscal system grasping for short-term revenue while postponing the difficult but necessary work of restraining spending growth.
* * * *
"Since wealth is the only thing that can cure poverty, you might think that the left would be as obsessed with the creation of wealth as they are with the redistribution of wealth.
"But you would be wrong."~ Thomas Sowell from bis 2006 column 'Political left has no interest in creating wealth' [hat tip Ira P]
"The most revealing truth about modern politics: 'Eat the rich' never targets the people who actually got rich by taking your money through taxes, regulations, and crony deals. It targets the people who got rich by creating products and services you voluntarily chose to buy because they improved your life.
"Jeff Bezos became wealthy because millions of people decided Amazon made their lives better. Meanwhile, career politicians become wealthy by redistributing other people's money while producing nothing of value. Guess which one gets labeled the villain?"The real parasites are the ones who get rich through political power rather than voluntary exchange. They use government force to transfer wealth from productive people to themselves and their allies, then convince you that the problem is the people who actually earned their money."This misdirection is intentional. If people understood that politicians and bureaucrats are the real wealth extractors, they might start asking uncomfortable questions about where all those tax dollars actually go and why the government keeps growing while problems never get solved."
“The history of the 20th century is full of examples of countries that set out to redistribute wealth and ended up redistributing poverty.”~ Thomas Sowell on 'The Fallacy of Redistribution'
“A widespread ignorance of a crucial economic issue is apparent in most discussions of today’s problems: it is ignorance on the part of the public, evasion on the part of most economists, and crude demagoguery on the part of certain politicians. The issue is the function of wealth in an industrial economy."Most people seem to believe that wealth is primarily an object of consumption—that the rich spend all or most of their money on personal luxury. Even if this were true, it would be their inalienable right—but it does not happen to be true. The percentage of income which men spend on consumption stands in inverse ratio to the amount of their wealth. The percentage which the rich spend on personal consumption is so small that it is of no significance to a country’s economy. The money of the rich is invested in production; it is an indispensable part of the stock seed that makes production possible. ..."In view of what they hear from the experts, the people cannot be blamed for their ignorance and their helpless confusion. If an average housewife struggles with her incomprehensibly shrinking budget and sees a tycoon in a resplendent limousine, she might well think that just one of his diamond cuff links would solve all her problems. She has no way of knowing that if all the personal luxuries of all the tycoons were expropriated, it would not feed her family — and millions of other, similar families — for one week; and that the entire country would starve on the first morning of the week to follow . . . . How would she know it, if all the voices she hears are telling her that we must soak the rich?“No one tells her that higher taxes imposed on the rich (and the semi-rich) will not come out of their consumption expenditures, but out of their investment capital (i.e., their savings); that such taxes will mean less investment, i.e., less production, fewer jobs, higher prices for scarcer goods; and that by the time the rich have to lower their standard of living, hers will be gone, along with her savings and her husband’s job — and no power in the world (no economic power) will be able to revive the dead industries (there will be no such power left).”~ Ayn Rand, from her 1974 article 'The Inverted Moral Priorities,' collected in The Voice of Reason
"An anti-capitalist ethic continues to develop on the basis of errors by people who condemn the wealth-generating institutions to which they themselves owe their existence.“Pretending to be lovers of freedom, they condemn private property, contract, competition, advertising, profit, and even money itself.“Imagining that their reason can tell them how to arrange human efforts to serve their innate wishes better, they pose a grave threat to civilisation.”~ F. A. Hayek on anti-capitalism sentiment in the West, from his book The Fatal Conceit: the Errors of Socialism
"The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate 'given' resources—if 'given' is taken to mean given to a single mind which deliberately solves the problem set by these 'data.' It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilisation of knowledge which is not given to anyone in its totality."~ third paragraph from F.A. Hayek's Nobel Prize speech from 1972. David R. Henderson reckons the published speech "is one of the ten most important articles published in economics in the last 80 years. So, it’s worth the effort." And the most important paragraph in this article, he reckons, is this third paragraph — and the most important sentence in the whole article being this paragraph's first sentence. Henderson himself helps to untangle Hayek's German locution in his own teaching notes. With all appropriate humility, I have a go below at translating it into plain English ...MY 'TRANSLATION':"Specialist knowledge is distributed throughout society — knowledge of particular circumstances or opportunities, 'local knowledge' if you like, which specific separate individuals possess and which will often appear contradictory. (There is after all no such thing as a 'collective brain' that knows or can know and integrate every single discrete circumstance.)"Yet in a rational economic order, those specific morsels of local and focussed knowledge are being put to use at every moment across society to find, transform, produce and distribute resources for ends whose relative importance only individuals know. And from that process comes the things we each value, produced by minds none of whom can ever see the whole."To put it briefly, it is a little-recognised miracle of the integrated utilisation of morsels of local knowledge, none of which is given to anyone in its totality, to create the wealth on which we all depend."
"The progressive personal income tax, the corporate income tax, and the capital gains tax all operate in essentially the same way as the inheritance tax. They are all paid with funds that otherwise would have been saved and invested. All of them reduce the demand for labor by business firms in comparison with what it would otherwise have been, and thus either the wage rates or the volume of employment that business firms can offer. For they deprive business firms of the funds with which to pay wages.
"By the same token, they deprive business firms of the funds with which to buy capital goods. This, together with the greater spending for consumers’ goods emanating from the government, as it spends the tax proceeds, causes the production of capital goods to drop relative to the production of consumers’ goods. In addition, of course, they all operate to reduce the degree of capital intensiveness in the economic system and thus its ability to implement technological advances. […] [T]hese taxes, along with the inheritance tax, undermine capital accumulation and the rise in the productivity of labor and real wages, and thus the standard of living for everyone, not just of those on whom the taxes are levied. ...
"Of course, many people will the line of argument I have just given as the 'trickle-down' theory. There is nothing trickle-down about it. There is only the fact that capital accumulation and economic progress depend on saving and innovation and that these in turn depend on the freedom to make high profits and accumulate great wealth. The only alternative to improvement for all, through economic progress, achieved in this way, is the futile attempt of some men to gain at the expense of others by means of looting and plundering. This, the loot-and-plunder theory, is the alternative advocated by the critics of the misnamed trickle-down theory."~ George Reisman from his book Capitalism: A Treatise on Economics (pp. 308-310.) Hat tip Per-Olof Samuelsson, who observes: "The productive rich (think Rockefeller, Carnegie, Ford, Bill Gates, Steve Jobs, etcetera, etcetera) actually flood the rest of us with wealth (and themselves become wealthy in the process). Taxing or expropriating them simply means to dam this flood. And this may make it appear 'trickle-down' – because governments and politicians will only allow a small portion of this wealth to trickle down to us; the rest of it lands in their own pockets."
"Don’t dare say that you want to 'make poverty history' when you hate capitalism. The only way to end poverty is to create more wealth, and the only way to create wealth is by the free market."~ Alice Smith [hat tip Ele Ludemann]
"The argument [is that]Wealth is a privilege, and with it comes the obligation of paying tax to benefit society."This is, obviously, piffle. For what is being said there is that only by paying tax does wealth benefit society. Which is, obviously, that piffle.
"It’s actually true that wealth is the product of having benefitted society. As in the William Nordhaus paper about who gains from entrepreneurial activity, it’s us out here, us consumers, who gain the vast, vast proportion of it. The entrepreneurs themselves gain some 3% or so of total value created. Only 3% too.
"As an example, Jeff Bezos has some $200 billion. A lotta cash, agreed. It’s also true there’s been the 'Amazon Effect.' By making the retail system more efficient the simple existence of the company has knocked 0.1 to 0.2% off the inflation rate. Every year for two decades. No, not 2 to 4% off retail sales that is, but 2 to 4% off the whole cost of living for everyone. That’s a sum vastly larger than the Bezos pile - especially when we convert that annual benefit into a capital sum so as to be able to compare it with the Bezos capital sum.
"It simply isn’t true, not in the slightest, that the justification for wealth is the tax paid upon it. It’s how much better off are we made by someone having made that wealth?"~ Tim Worstall from his post 'If people don’t grasp the basics then….'
How often do we hear that government "austerity" is destructive —that it is the job of government, or their central bank, to "stimulate demand"? Or that growth can be gussied up by gobs of government cash? In this guest post, Frank Shostak is here to dismantle those ideas, and to explain that monetary pumping does not create new wealth, it destroys it ...
No man produces, but with a view to consume or sell, and he never sells, but with an intention to purchase some other commodity, which may be immediately useful to him, or which may contribute to future production. By producing, then, he necessarily becomes either the consumer of his own goods, or the purchaser and consumer of the goods of some other person.An individual’s demand is constrained by his ability to produce goods. The more goods an individual can produce, the more goods he can demand. For example, if five people produce ten potatoes and five tomatoes, this is all that they can demand and consume. The only way to consume more is to produce more.
When goods are carried to market what is wanted is somebody to buy. But to buy, one must have the wherewithal to pay. It is obviously therefore the collective means of payment which exist in the whole nation that constitute the entire market of the nation. But wherein consist the collective means of payment of the whole nation? Do they not consist in its annual produce, in the annual revenue of the general mass of inhabitants? But if a nation’s power of purchasing is exactly measured by its annual produce, as it undoubtedly is; the more you increase the annual produce, the more by that very act you extend the national market, the power of purchasing and the actual purchases of the nation. . . . Thus it appears that the demand of a nation is always equal to the produce of a nation. This indeed must be so; for what is the demand of a nation? The demand of a nation is exactly its power of purchasing. But what is its power of purchasing? The extent undoubtedly of its annual produce. The extent of its demand therefore and the extent of its supply are always exactly commensurate.
Since genuine demand only comes from the supply of products, and since the government is not productive, it follows that government spending cannot truly increase demand.If the pool of real savings is large enough to fund government spending, then a fiscal and monetary stimulus will seem to be successful. However, should the pool of real savings decline, then regardless of any increase in government outlays and monetary pumping by the central bank, overall real economic activity cannot be revived. In this case, the more government spends and the more the central bank pumps, the worse off wealth generators will be, eliminating prospects for a recovery.
The only real consumers are those who produce on their part, because they alone can buy the produce of others, [while] . . . barren consumers can buy nothing except by the means of value created by producers.
The Greens's Wealth Tax is being attacked for its unfairness (an effective marginal tax rate of 95%) for its incoherence (how can a retired home-owner with little income pay the impost?) for its spread (almost anyone with even an average-priced house in a trust is also hit) for its inefficiency (the revenue gained won't be spread far enough to matter) and for the likelihood of so-called "capital flight" -- of the wealthy simply upping sticks and taking their capital with them.
All valid criticisms.
Some are even rightly criticising the morality of the impost:
But what even the Wealth Tax's many critics often fail to understand, as George Reisman explains in this reposted Guest Post, is that the "top 0.7%" of wealth-owners provide the standard of living of the other 99.3%. What is the role of great wealth in a capitalist economy? No, not exploitation, but further prosperity...
