Thin Lizzie’s Wedge

I’m starting to wonder whether Elizabeth Warren is another Karl Rove/Steve Bannon dirty trick—a plant inside the Democratic Party with the perfect appeal to make the party sign up for the biggest political suicide note since the Labour Party decided to run on unilateral disarmament against Margaret Thatcher in 1983. (Labour lost in a historic landslide.)

Warren’s Medicare-for-All will depend apparently on a 6 percent wealth tax on the super-rich, up from a previously proposed 3 percent. (Funny how the tax rate is rising already.) Here’s a riddle. Let’s just take Jeff Bezos and Bill Gates, each worth something like $100 billion in round numbers. I am continually surprised by the number of people who think that Bezos, Gates, Buffett, etc., all have $100 billion in cash in a bank savings account or something—or even stacks of $100 bills in a vault somewhere. The fact that these wealth figures are the capitalized market value of the immense asset base (tangible and intangible) on paper (and only at the margin) is lost on everyone.

So let’s just take a hypothetical annual 3% wealth tax and run it out. Gates, Bezos, Buffett, et al. will have to sell $3 billion worth of their stock holdings—each year—to send their wealth tax check to the IRS.

Question: Just who is going to buy that much stock every year?

And what would the effect of the many forced liquidations have on stock values, not to mention credit markets if Bezos decided to borrow the money every year (and, incidentally, wipe out any income tax liability for the year—heh)?

Now let’s move down the food chain a bit to the many large fortunes that are privately owned, rather than expressed in the market value of a publicly-traded company, such as people in real estate, or in any kind of business with a lot of fixed assets not easily liquidated (such as someone who owns a lot of fast food franchises). How would these assets be valued and taxed? The socialist economist advising Warren on her scheme, Gabriel Zucman, offers this suggestion:

So—the IRS is going to get into the private placement business. Great. I’ll look forward to this, and go very long on popcorn futures. Question: And who is the IRS going to sell these “shares” to? I’m just sure there will be a long line of investors wanting to buy minority shares in a closely-held businesses, which will have to be done at a huge discount to true market value in any case.

The detachment from reality here is breathtaking. But reality may not be the main object of this whole exercise. What we’re really seeing in action is “punitive liberalism.”  I refer back to a suite of tweets I shared some months ago:

Question: I guess it is true that billionaire Oprah Winfrey exploited a monopoly over herself, but I’m not sure just how you’d “break up” Oprah. And in any case I can’t discern any way in which Oprah competed unfairly against, say, Sally Jessie Raphael. Perhaps Prof. Reich can explain it in his next $50,000 lecture.

I like this chart that one of the wealth taxers has offered, showing what the effect would have been had the proposed wealth tax been in place starting back in 1982:

The economic illiteracy of this is staggering, as it means the enterprise value of each of the companies behind these figures would be much smaller, and/or the cost of capital (a key driver of business investment) would be much higher.

Incidentally, most European nations that attempted a wealth tax have abandoned it. But the ones that supposedly still have it fall out like this:

You’ll notice the tax rates are all substantially below what Warren is proposing. Note also that most of these European wealth tax schemes subtract debt from gross asset value, as they should. If adopted here, this would provide a huge incentive for rich people to load up on debt to escape or minimize the tax, and since interest is deductible against income taxes, guess what? Warren’s proposal is going to be a full employment act for tax lawyers and accountants. The evasion and financial engineering schemes are going to be massive. My hunch is that the proposed wealth tax won’t bring in even half as much as Warren estimates. Good times!