The Problem with the Wealth Tax

by | Nov 6, 2019 | Taxation

A Note on Asset Prices, Wealth, and Inequality

Warren and Sanders et al. are misled by the government’s inflation of the money supply into believing that the stagnation and decline of our economic system in recent decades is the result of growing economic inequality.

The truth is that both the appearance of increasing wealth of the rich and the reality of declining actual wealth are the result of the government’s pouring new and additional money into the stock and real estate markets, where the effect is to raise prices.

Since the rich own far more stock and real estate than the average person, the effect of this rise in prices is that economic inequality appears to increase. (Somehow the sharp declines in apparent economic inequality that necessarily accompany market busts, are not reported.)

While the rich appear to gain because of the rise in the prices of their assets, in reality they lose.

This is because the taxation of their profits on the sale of stocks and real estate prevents the funds accruing to them from keeping pace with the rise in prices. Their funds grow only to the extent of what remains after the payment of taxes.

For example, imagine that the infusion of new and additional money into the stock and real estate markets increases prices there by 10%. Originally, one had an asset worth $1 million. Now it can be sold for $1.1 million.

But if the capital gains tax is 25%, the seller ends up with only $1.075 million, a 7.5% gain, while the prices of the assets available for him to purchase have increased by 10% on average.

This is a major way in which inflation — the government’s expansion of the money supply — destroys an economic system. It creates the appearance of business prosperity along with the fact of general impoverishment, which results in blaming poverty on business and profits.

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One “solution” to inequality — put forth by Elizabeth Warren — is the wealth tax. Warren advocates a wealth tax that every year would take away 2% of the wealth of everyone worth more than $50 million, and 3% of the wealth of everyone worth more than $1 billion. This taxing away of capital means less means of production and thus less production and higher prices. At the same time, it means less demand for labor and thus lower wages. Elizabeth Warren’s program is a call for mass impoverishment. And the same is true of the essentially similar programs of her fellow haters of the rich, such as Bernie Sanders and Ocasio-Cortez.

George Reisman, Ph.D., is Pepperdine University Professor Emeritus of Economics and the author of Capitalism: A Treatise on Economics. See his Amazon.com author's page for additional titles by him. Visit his website capitalism.net and his blog atGeorgeReismansBlog.blogspot.com. Watch his YouTube videos and follow @GGReisman on Twitter.

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