John O. McGinnis (Northwestern), Taxing Ownership:
California may put an extraordinary wealth tax before voters this fall. Under the proposal, anyone worth more than a billion dollars would see 5 percent of their wealth taken next year. Supporters cast it as a one-time measure targeting only the super-wealthy, yet that reassuring description may mislead voters. A state that enacts such a tax to fill its empty treasury will be tempted to do so again and even expand it when those coffers run dry. Meanwhile, California is not alone. Massachusetts Senator Elizabeth Warren has proposed a yearly federal wealth tax of 2 percent on fortunes above $50 million and 3 percent on those above $1 billion.
Friends of liberty should be worried by this novel means of raising money in the United States, even apart from the significant questions about their constitutionality.
Wealth taxes fall even on productive, illiquid capital as if it were idle treasure rather than the dynamo of our economy. They would require a vast administrative apparatus to collect, while generating endless forms of legal tax avoidance. Today, by threatening the capital of wealthy innovators, wealth taxes also may endanger national security and even our longevity. AI is a public good essential to our military, as recent coverage in the New York Times acknowledges. Its knowledge spillovers also accelerate scientific discovery. And progress in AI benefits greatly from founders’ enterprises and venture capital, whose advantageous deployment will be most discouraged by such taxes. In short, wealth taxes are terrible not because redistribution is necessarily always wrong, but because they tax ownership rather than realized gains and fall especially hard on entrepreneurial and strategically important capital.
Classical liberal and commercial republics have generally not taxed ownership of productive assets. The economic growth they create helps maintain social peace. As the political philosopher Ernest Gellner observed, modern democracies rely on “sustained and perpetual growth” to avoid the dissension that comes from groups fighting over a static or shrinking pie. But the costs are not only economic. As I describe in my recent book, Why Democracy Needs the Rich, a free society depends not only on limits on government, but on independent centers of initiative and judgment outside the state. A tax on ownership weakens those centers and increases political control over all aspects of our lives.
Wealth taxes in America have traditionally targeted only land or housing. These assets, which are visible and easier to value than private businesses, are not sources of innovation. Because of these qualities, they do not substantially harm productivity or impose high administrative costs on collection. …
A wealth tax pushes investors away from risky but socially useful bets and toward liquidity and short horizons. Thus, wealth taxes in general, and California’s in particular, are dreadfully timed because they would weaken both the incentives for entrepreneurship and the supply of capital needed to advance AI. That use of capital should remind us that wealth is about more than funding luxury consumption. It can be, and often is, the source of public good development. AI is the most important public good in generations, because it is a general-purpose technology with hugely positive knowledge spillovers. More powerful AI also accelerates scientific research. DeepMind’s AlphaFold has revolutionized protein analysis, making two hundred million protein structures available and enabling biotech researchers to design vaccines and discover new antibiotics more effectively. That same breakthrough is helping researchers discover materials for new batteries and solar panels to help replace fossil fuels. …
Politicians decry the inequality generated by tech billionaires. But AI also shows that the ultrawealthy can accelerate progress that yields cheaper services, better medicine, and improved education for everyone. Of course, their social utility does not mean we should not have more progressive taxes. That is a complicated question of getting the incentives right. But the fact that the United States is by far the AI leader in the free world suggests that our incentives for cultivating the culture that produces this public good are not poorly calibrated. The rest of the West here, as elsewhere, free rides on our achievements.
The ultrawealthy have always been a target of envy—and like other sins, envy distorts reasoning. It may be that even after reforming wasteful government spending and entitlements, we will still want to raise some taxes on the wealthy to address our fiscal imbalances. But wealth taxes are an especially destructive way to do that. In an AI age, they are not merely bad tax policy. They are downright dangerous.
The Dispatch: Mansion Impossible: The New Wealth Taxes, by Peter Gattuso, James P. Sutton & Ross Anderson
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