The Goal
Before answering how the purpose of capital should be changed to reach our goals, we must first decide what our goals are. Broadly speaking — and staying purposefully vague so as to not invite dissent — I think that capital should be put towards helping and bettering humanity. Given that lawmakers have a duty to the citizens of their country, a more practical goal is to allocate capital to benefit the citizens of the given country. Lawmakers cannot possibly correctly allocate all the capital in the country in a just or efficient manner, but instead can and should try to incentivize capital to be put to use in a desirable way. Traditionally we have incentivized putting capital towards innovative purposes as we thought innovation was what would best help humanity, and it was thought that the best way to provide these incentives was through the prospect of wealth.
Today however the socioeconomic landscape is very different than when we made the decisions that these were the best incentives to be making. It has been over one hundred years since these decisions were made and perhaps it is time to reconsider them, or at least update our thinking to the modern day. The laws no longer optimally incentivize the use of economic capital amongst the wealthy, and human capital is far from being used in the most efficient way. Aside from this, innovation is no longer as critical on a global scale as it was 100 years ago, and it is not clear that we should keep prioritizing it as we have. We still have many challenges to face, but we are at the point where it is no longer the best solution to “innovate them away”. On the margin, solving them through social means would be easier than through technological ones. Our laws are no longer as successful as they can be at encouraging innovation or allowing people to benefit from that innovation, and it is time to change them.
The Idea
I argue that implementing a wealth tax to complement or partially substitute the existing income tax and funding a universal liveable income would better allocate capital to meet the challenges of today. The wealth tax’s positive impact would come through diverting economic capital to places where it can better help society, and the liveable income would free human capital to more long-term tasks. I debated whether lower income and wealth taxes coupled with an extremely high luxury tax (similar to Hong Kong) would be better, but ultimately decided that it would be too easy to evade such a tax. Instead, I believe the wealth tax and a universal basic income system could lift humans out of poverty, improve the health of both us and our planet, and solve many other problems facing developed nations today.
The Current Method No Longer Achieves Its Purpose
Right now, capital is largely being deployed to either survive or earn more capital. In America, 78 percent of workers are living paycheck to paycheck, and 40 percent have “unmanageable” levels of debt3. People in this position are not concerned with putting their resources (human capital, labour hours) towards long-term projects that benefit humanity. Out of sheer necessity, they have a very short-term view in how they apply their capital. Someone who needs to work 12 hours a day in an Amazon factory and comes home exhausted is unlikely to come up with the next Amazon, and if they did, they could not afford to quit their job to pursue the idea. If economic capital were put towards replacing human workers in menial jobs through automation, that human capital could be redirected to more beneficial tasks like building infrastructure, pursuing passions, or acquiring more education.
This short termism of working to earn a paycheck instead of working towards a goal carries over to high-income earners as well. People are uncomfortable leaving their well-paying jobs to pursue business ideas because they lack a safety net if their idea fails. If they had some form of security, more of these highly skilled people would quit their jobs to pursue their ideas that could change the world.
On the other hand, there is the group of ultra-rich people with most of the economic capital4. A fundamental aspect of capitalism is encouraging innovation through the possibility of monetary rewards, but at the point where people pursue monetary rewards through rent-seeking rather than through innovation the system breaks down. When you have a lot of capital, there are easier ways to make more money than by innovating, and hence we have short-termism. One could argue that the rent-seeking of the wealthy is still contributing positively to society, but we should nonetheless do our best to disincentivize this sub-optimal allocation of capital.
An example of rent-seeking as a drag on humanity is companies in monopoly situations. Monopolies aren’t bad per se, but what matters is who benefits from these monopolies. Some industries, such as those with high upfront costs, are naturally conducive to monopolies. This mostly becomes an issue when the sole firm uses the consumers lack of choice as a license to charge unreasonably high prices not justified by the cost of entry, and a small group of already rich benefit at the expense of the masses. Instead, the profits from these monopolies should be invested back into improving the service. For example, the profits from an internet company could go towards improving the infrastructure further so that consumers benefit from faster internet speeds or lower prices. Instead, what we see happening is the profits being distributed to shareholders while the consumers continue to pay exorbitant prices for subpar service (at least in North America).
This is essentially rent-seeking in its worst form. Innovation is not happening, infrastructure is not being upgraded, and those who are invested in the monopolies are simply amassing more wealth based on the fact that they have wealth to begin with. The idea behind capitalism was to encourage innovation, but we have gotten to a point where these players are just encouraged to rent-seek and amass more wealth. In fact, the situation is just getting worse with wages stagnating but capital continuing to yield a return. With each year of this the wealth is growing more and more concentrated, there is less incentive for innovation, and we are moving further from the golden ages of capitalism and closer to the dark ages of feudalism. Since capital earns higher return than income, a small group is gradually “pulling away” from the others, and in fact creating barriers to innovation in the form of lack of resources to those not already wealthy. A higher wealth tax would put this capital to better use, better humanity by spreading the benefits or past innovation in a utility-increasing way, and remove barriers to future innovation caused through excessive resource concentration
In America if you have 1 million dollars (which over 11 million households do9), even investing in a virtually riskless 5-year certificate of deposit would earn you 31 thousand dollars per year6 — this is more than the income of almost 25 percent of American households7. Just being born into the right family gives you an almost insurmountable advantage. Currently we view it as “unfair” to tax someone’s wealth that they have left over for their family, and there is the argument that part of the reason people work so hard is to be able to leave a nest egg for their children. I counter that income tax actually gives more of a reason not to work hard as it taxes your efforts directly, and in a world without extreme amassing of wealth and a larger safety net people wouldn’t be as concerned about leaving a smaller sum to their children. In the context of the economic arguments, taxing wealth seems to create better incentives and will be better for humanity, and on balance this doesn’t seem any less “fair” to those being taxed than a simple income tax. In fact, it seems fairer to me as income tax is usually on what you worked to earn that year, whereas wealth tax would often target wealth that you did not do anything to accumulate.
Progress Through Social Change Rather Than Technological
The challenges of prior centuries have been technological, and thus laws have had to incentivize technological innovation. Now our challenges are mainly social, so we should incentivize social change. Global warming, hunger, and poverty are not present because of our inability to solve them, but rather our collective unwillingness. We can produce enough food it’s just being distributed the wrong way5. We can cut down emissions to sustainable levels but choose not to. A more equal distribution of wealth would ensure that nobody goes hungry and a wealth tax could fund long-term renewable energy projects. These are just two examples, but the pattern is larger than that.
Medical breakthroughs and a higher quality of living have been increasing life expectancy for centuries, but now we have reached a natural boundary where we cannot do much more for those who already have access to the technology2. Instead, we could increase average life expectancy by a lot more by simply getting the general population more access to these already existing medical technologies (especially in the US) and higher qualities of living. Of course, more innovation could do this as well, but we are at the point where social change would give much higher marginal benefits.
Some Arguments Against
A tax on wealth is quite controversial, yet somewhat reassuringly it seems that most of the concerns are practical rather than with the idea itself. Here I will touch upon some of the biggest of these issues and try to offer potential remedies. By far the largest issue historically with wealth taxes has been capital drain from a country, and in fact this has been why many European countries have abandoned it over the years. The problem is that if one country implements a wealth tax and another does not, high net worth individuals will move their assets out of the first country and into the second. This hurts the local economy and effectively lowers the total tax revenue. The easiest way I see around this would be through global tax cooperation. If a majority of large countries agree to this, then they could force smaller countries to comply through refusing to do trade with anyone who doesn’t introduce a similar regime. Those that still hold out would face incredibly high transfer taxes. This way, high net worth individuals would be disincentivized to avoid taxes by parking their funds in these smaller regimes as they could only spend their money there.
Another practical issue is the actual calculation of the wealth tax. The tax would most likely only apply to high net worth individuals, but these people often have quite illiquid assets that are hard to put an exact value on. Some jurisdictions have tried to work around this by only including real estate, and others by using purchase price. I think both of these are sub-optimal in the long run, but they are good starting points.
The final argument is that the rich donate much of their money through foundations anyways, and that they are better suited to decide where their money should go than the government. Unfortunately these foundations are often forms of tax evasion, and even when well-intentioned and commendable, the individual is heavily biased and may not be giving money where it is socially optimal. This is why we get much more donated to breast and prostate cancer research than cardiac disease, even though the latter takes many more lives1. It is in fact these efficiency arguments that got us into the mess we are in in the first place. The government is not capable of allocating capital efficiently, but neither is the free market when left completely untethered.
I don’t think our current system has it all wrong, but it is outdated and needs to be updated based on what has happened in the last century. A wealth tax coupled with a universal basic income would be better than our current incentive scheme at allocating economic and human labor capital to face the challenges of today and tomorrow.
References:
1. Allen, Jeanne. 2014. Infographic Compares Donations to Disease and Finds Big Disparities. https://nonprofitquarterly.org/2014/09/05/infographic-compares-donations-to-disease-and-finds-big-disparities/
2. Clark, Liat. 2016. Humans may have a natural lifespan — and we’ve already reached it. https://www.wired.co.uk/article/humans-may-never-age-beyond-125
3. Dickler, Jessica. 2017. Most Americans live paycheck to paycheck. https://www.cnbc.com/2017/08/24/most-americans-live-paycheck-to-paycheck.html
4. Ingraham, Christopher. 2017. The richest 1 percent now owns more of the country’s wealth than at any time in the past 50 years. https://www.washingtonpost.com/news/wonk/wp/2017/12/06/the-richest-1-percent-now-owns-more-of-the-countrys-wealth-than-at-any-time-in-the-past-50-years/?noredirect=on&utm_term=.7787fc493634
5. Koba, Mark. 2013. A hungry world: Lots of food, in too few places. https://www.cnbc.com/id/100893540
6. Marcus by Goldman Sachs. 2019. High-yield Certificates of Deposit. https://www.marcus.com/us/en/savings/high-yield-cds
7. Statista. 2019. Household income distribution in the United States in 2017. https://www.statista.com/statistics/203183/percentage-distribution-of-household-income-in-the-us/
8. Sundaram, Jomo Kwame and Hilal Elver. 2016. The world produces enough food to feed everyone. So why do people go hungry? https://www.weforum.org/agenda/2016/07/the-world-produces-enough-food-to-feed-everyone-so-why-do-people-go-hungry
9. Walper Junior, George H. 2018. New Spectrum Group Market Insights Report Reveals Significant Growth in US Household Wealth in 2017. https://www.einnews.com/pr_news/438058593/new-spectrem-group-market-insights-report-reveals-significant-growth-in-u-s-household-wealth-in-2017
