Billionaires compensate us many times over. Wealth taxes endanger that

No matter what happens in Tuesday’s elections, support for wealth taxes keeps growing. Its justification is based on the idea that the very rich owe all of us something, and taxing their fortunes is collecting on that debt. We’re told their success fuels inequality and that it’s selfish of them to keep so much, especially if they don’t proclaim that they want to do more for society.

Former IMF chief economist Olivier Blanchard of France recently gave this narrative a clear voice. Writing on X, he wondered why California’s wealthiest are spending so heavily to defeat Proposition 40, the supposed one-time 5% tax on the net worth of billionaires. Blanchard added that billionaires “typically have not indicated that they are building their wealth to eventually make the world a better place.”

The entire notion misunderstands how fortunes are made. In a market economy, people don’t build great wealth first and redeem it later through good works. They build it by making the world better first.

When I buy an $800 smartphone, it’s because I value the phone more than whatever else I would have bought with the money. The seller values my $800 more than they do the phone. We both walk away richer by our own measure. Neither owes the other anything more.

Repeat this exchange a few hundred million times, and vast fortunes take shape for the people who create amazing technology so abundantly and affordably that we take it for granted. More importantly, though, people hand over every cent of it voluntarily.

As my colleague Arnold Kling aptly explained over the weekend, “Profits are earned within a positive-sum game for society. Profits induce firms to serve consumers and to innovate.” The drive for wealth taxes relies on “the opposite point of view. It regards profits as something that businesses take from the rest of us, as if we can take innovation and efficiency for granted. [It] acts as if we are in a zero-sum environment in which one person’s gain is necessarily another person’s loss.”

And, yes, the gains are divided more fairly than people think. Nobel laureate and Yale University economist William Nordhaus estimated that innovators in the U.S. business sector personally captured, on average, a mere 2.2% of the social surplus their innovations created between 1948 and 2001. The other 97.8% went to everyone else in the form of lower prices, higher wages, better products and goods, and services that didn’t previously exist.

In short, the world has already been compensated, many times over.

Those urging billionaires to acquiesce also err by blithely assuming that the state that grabs the money will use it well enough to “make the world a better place.” The burden of proof is on them. California’s government already spends roughly $350 billion a year. What will the extra few billion accomplish that the rest hasn’t?

“Giving money and power to government is like giving whiskey and car keys to teenage boys,” as journalist and satirist P.J. O’Rourke used to say. Maybe California’s billionaires aren’t eager to fund a Merced-to-Bakersfield rail line that the state prices around $35 billion and its inspector general puts closer to $48 billion. Perhaps they’re hesitant to backfill pension funds like CalPERS, whose staff concedes is unlikely to hit an assumed 6.8% return without leaning on private equity.

Prop 40’s revenue is earmarked for health care, but money is fungible. In the end, California has one budget. Every earmarked dollar frees another for something else. Some billionaires might simply have concluded that their philanthropy does more good elsewhere, or that their dollars are more beneficial when invested in private enterprises.

The tax also doubles down on California’s worst habit: spend, spend, spend and then tax, tax, tax. The money is never enough to cover all the spending. A one-time levy spent over five years doesn’t fix that. It funds new commitments with temporary money. Some will want to make the tax permanent, which its intellectual architects clearly prefer and may have made possible. And yet that still won’t be enough.

That’s the commitment problem which Blanchard admits California can’t solve. Billionaires are wise to distrust the “one-time” promise.

What worries me most is the moral framework. When a society convinces itself that the people making life better and less costly are the problem, we eventually stop getting those people.

Contrary to Blanchard’s naïve belief, billionaires aren’t lacking in public spirit. Even if we ignore their often massive charitable giving, we can’t forget that the market already collected their contribution and handed a large share of it to the rest of us. We should stop demanding they apologize for the other two cents.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University. This article was produced in collaboration with Creators Syndicate.