Tax Billionaires Out of Existence

20 December 2019

People don’t like it when I tell them that many of the world’s problems are due to wealthy people, and that we need to take away the wealth of rich people through extreme taxation and strict laws.

Consider Bill Gates with a fortune of around 106 billion dollars. He recently complained about Elizabeth Warren’s proposed tax of 2% on wealth over 50 million dollars and 3% on wealth over a billion dollars. That tax would cost him about $3 billion dollars per year. Suppose his wealth is mostly invested and gets a return of 5%/year, then, under this wealth tax his overall fortune would still increase by 2% per year; that is, he would still get more than $2 billion richer each year. Actually since he typically gets much more than a 5% return on his money, his fortune would continue to increase rapidly under Warren’s wealth tax. In reality, Bill Gates has nothing to complain about.

However, in my opinion, this Warren wealth tax is much too low. I think we should tax the rich enough so that billionaires are all eliminated. Let’s figure out what a good tax rate would be.

We start by asking how much money does a person really need?

Does anyone need to get more than $10,000 per week of unearned income? Suppose you spend $200 every day for nice meals in restaurants, buy a new $100,000 car every year, pay $10,000 a month to rent a nice place (or for your mortgage), and take a trip to Tahiti or Greece every month. That would cost $10,000/month on housing, $6000/month on food, $8000/month on cars, $10000/month on trips, and still leave about $9000/month for other things. So, in my opinion, $10,000 per week is enough for anyone. By the way, $10,000/week comes to about $520,000/year or $43,300/month, and puts one near the bottom of the top 1% wealthiest Americans.

How much wealth does a person need to generate $10,000/week in passive income? Consider someone worth $11M who does not work at all but just lives off their wealth. If they get a 5% return on investment (ROI), then they get more than $520,000/year or $10,000/week. The typical ROI on large fortunes is larger than 5%, so this is a very conservative assumption. So, if you agree with my assumption that $10,000/week is enough for anyone, then no one needs to have more than $11M in wealth. If you think $10,000/week is not enough, then how about $20,000/week? or even $50,000/week? With my assumed ROI it would take around $52 million to generate $50,000/week. A billion dollars fortune would give unearned income of about $1 million dollars per week, which is just a ridiculous amount of money for anyone to spend. And Bill Gates at $106 billion? That’s $100 million dollars of unearned income every week of the year.

Now in the above I didn’t include taxes. Investment income is typically taxed at a very low rate, e.g. 15%-20% for capital gains, so including taxes at the current tax rate makes little difference. For example, including a 15% tax on investment income effectively decreases my assumed ROI to 4.25%, meaning you would need $13 million rather than $11 million in get $10,000/weeks. Even if capital gains were taxed as normal income at the current maximum of 37%, one would still only need $16 million to generate your $10,000/month.

So, in my opinion, we should highly tax everyone who has more than around $13 million in total wealth until they are down to $13 million. However, to be extra conservative, let’s increase that amount to $50 million (Warren’s threshold for a wealth tax), thus forcing everyone to live on less than around $2 million/year ($40,000 per week) unearned income. Note, there is nothing preventing these wealthy people from actually working and making more money by their own efforts; this is just limit on their unearned income.

So consider Bill Gates with his $106 billion wealth. We already saw that Warren’s 3% tax on wealth over $1 billion does not reduce Gates’ unearned income at all. Suppose the wealth tax was 6% on wealth over $50 million. Conservatively assuming Gates’ living expenses are $40,000/week, with an after tax ROI of 5%, he would still be worth $64 billion after 50 years of wealth taxation. Thus a 6% wealth tax has negliable effect on a fortune the size of Gates’. How about a 20% wealth tax? After 45 years of 20%/year wealth tax Gates’ fortune would finally drop to around $50 million. That is a long time to wait. If we wanted to get Gates to $50 million in 10 years it would require a yearly wealth tax of around 60%. So the tiny wealth tax Warren is proposing is basically nothing to the billionaires.

Objection: I thought it is necessary to have wealthy people so that they invest their fortunes in businesses thereby creating jobs. If we tax billionaires out of existence, who will invest in companies and create jobs?

First, this is a well known fallacy much promulgated by wealthy people and the business media outlets they control. Car companies don’t create cars because of their wealthy owners’ investments, but because there are middle class people who want cars and have the money to buy them. The wealthy owners do control whether those cars are made in the USA or abroad, but it is the wealth owned by the middle class that creates the demand. Standard economics says that when there is a demand and a free market a way will be found to meet that demand. Suppose there were no super wealthy people and no car companies, but lots of demand for cars. Someone (probably many) would borrow money from banks, build factories and start successful businesses making and selling cars. Those clever people might become wealthy! Wealthy people don’t create the middle class, the middle class creates wealthy people.

Second it is important to consider what happens to all that tax money the public will collect in eliminating billionaires. If that money is spent on services that help the middle class and the poor, such as free public education, free health care, fighting climate change, environmental improvements, fighting poverty, etc. then that money will increase the wealth of the middle class (via jobs for teachers, nurses, environmental scientists, solar energy workers, farmers, etc.), thereby allowing the USA to return to the era before the 1980’s when the middle class was better off than it is today. (In 1985 the middle class owned 37% of the US total wealth while the top 1% owned only 23%; today the middle class own 28%, while 1% have increased their wealth to 37%; see https://medium.com/@kimgriest/the-real-reason-the-american-middle-class-is-disappearing-e7700c593368

On the other hand, if that tax money is spent on wars, bank bailouts, subsidies to oil and drug companies, etc. it will just be a transfer of money from one group of wealthy people to another. It is well known that the very wealthy are more likely to hoard their money in off-shore tax havens than the middle class, who, for most part, just spend their money, thereby keeping it in circulation and helping the economy. Many studies show that a dollar in a middle or a lower class hand is more valuable to the economy than a dollar in the hand of a wealthy person. Again, billionaire money is not needed for any purpose, so let’s use democracy to eliminate it.