In response to Hillary Clinton’s pandering to the economic ignorance and myopia, as well as to the prejudices and greed, of her base by calling for higher taxes on “the rich,” my friend Stuart Anderson sent this e-mail to me, which I share here in full with kind permission:
In Ashlee Vance’s book on Elon Musk , he describes how both Tesla and SpaceX, which combined employ thousands of people, were both running out of cash and within days of not being able to meet payroll near the end of 2008. Musk liquidated a great deal of his personal wealth and guaranteed loans to keep the companies solvent. Shortly after, Tesla cars hit the market and SpaceX got a huge contract from NASA based on the success of the SpaceX rockets.
The bottom line is that if Musk had a lot less available personal wealth (for example, if he was taxed a great deal more), it’s unlikely either company would have weathered the years it took to develop viable products.
Stuart’s example, while not the cleanest (Musk benefits unjustly from government subsidies ), nevertheless points to an important reality that is almost never recognized by proponents of redistribution – namely, most of the wealth of the superrich is not in the form of lavish consumption items that can be “redistributed” from rich to not-rich without the not-rich eventually suffering significant economic harm as a result. Instead, most of the wealth of the superrich is in the form of savings and assets that, if invested by the superrich wisely in their own best interest, yields benefits not only to themselves but to millions of others in the form of more and less-costly consumer products as well of expanded economic opportunities (“jobs”).
Let’s say that Ms. Bigbucks today has a net worth of $10 billion, with (say) 4.5 percent – $450 million – of that wealth in the form of consumption items counted toward her wealth – a few spectacular homes, a private jet, luxury cars, jewelry, a yacht, rooms full of original art, and a thoroughbred pony for little Bigbucks, Jr., to ride when he’s not with Nanny. Ms. Bigbucks also has another 0.5 percent of her wealth – $50 million – on hand as ready cash that she uses to pay Nanny, as well as to pay her pilots, bodyguards, personal masseuse, personal chef, personal shopper, and personal physicians.
The rest, the bulk – 95 percent – of Ms. Bigbucks’s personal fortune is tied up in a series of factories that produce consumer items that consumers can’t get enough of. (That’s why Ms. Bigbucks is so wealthy: she figured out how to produce at low costs items that consumers love so much that they willingly pay for these items prices above the costs of producing and distributing these items.) The operation of these factories generates for Ms. Bigbucks an income of $1 billion. From this sum, Uncle Sam and state and local governments immediately confiscate as personal income and property taxes $500 million. Ms. Bigbucks reinvests 90 percent ($450 million) of her remaining, after-tax annual income into her factories and other productive assets. She then uses the rest – $50 million – each year, as per above, to finance her lavish lifestyle.
Being a savvy investor and businesswoman, each year Ms.Bigbucks’s personal fortune grows at a rate of about five percent.
So here’s the question: Would ordinary men and women be enriched if the government confiscated the great bulk of Ms. Bigbucks’s fortune? How would the government do this confiscation? One way would be to nationalize Bigbucks, Inc. But then the fortune would still be, as it was before nationalization, tied up in the factories; the only difference from society’s vantage point would be in whatever ways the factories are operated differently. Is it likely that a nationalized Bigbucks, Inc., would be run as efficiently and as productively as it was run when Ms. Bigbucks owned and oversaw its operation? Hardly. (Almost everyone today, other than those benighted folks with “Bernie 2016” bumperstickers, understands that nationalization is a lousy economic idea.)
So perhaps the government would instead liquidate Bigbucks, Inc., and distribute the proceeds to the masses. One notable reality of this course of action is that, because much of the monetary value of Bigbucks, Inc., is a direct product of the fact that an astute businesswoman oversees its operation, this total monetary value falls the moment control is taken away from Ms. Bigbucks. That is, the same structures, machines, inventories, and contractual arrangements that are Bigbucks, Inc. have a different total market value depending upon how those things are used. And certainly the liquidation value of Bigbucks, Inc., will be lower – likely very much lower – than the total value of Bigbucks, Inc. kept intact and with an unmolested Ms. Bigbucks still the owner in charge.
An even more notable reality, however, is that even if Bigbuck’s, Inc., is liquidated with no loss of total value and the proceeds of this theft “redistributed” to the masses, the masses might be made better off today but will certainly be made worse off as time passes. How many entrepreneurs will in the future take risks and expend effort to build companies? Almost none. And don’t fail to count the loss to the masses of the stream of outputs that would have been, but that will no longer be, forthcoming from Bigbucks, Inc.?
The principal point here is that most of the wealth of the superrich is in the form of productive assets that not only will lose most of their monetary value if seized by the state for ‘redistribution’ but is (therefore) in a form that produces significant economic benefits for its non-owners.
Oh, oh, – I know. No one today (well, at least not every ‘redistributionist’ today) talks of wholesale confiscation of the wealth of the superrich. Just some confiscation. Nay, not even “confiscation.” That sounds so un-American and brutish. Let’s call it by some lovely euphemism – perhaps “surcharge” (as it is called by a currently ascendant, mad-for-power machine politician ). Yet what principles guide such (let’s call them) ‘moderate
Repair to the hypothetical example used here of Ms. Bigbucks. How much more of her wealth (beyond whatever she personally, and her company, already pay in taxes) is “fair” for her to pay? Describe an ethical principle that assures you (and, more importantly, will assure open-minded other people) that Ms. Bigbucks ‘should’ pay more? Shall this ‘more’ come from the value of her assets? (If so, Bigbucks, Inc., becomes less productive and, hence, unseen consumers and workers suffer unmeasurable, but real, losses in the future.) Or shall this more (contrary to the wishes of Thomas Piketty ) come only from the stream of annual income that she uses to finance her current consumption? If so, tell me how you conclude that her $50 million of consumption is excessive? Excessive compared to what? Compared to the value of total output that her investments produced for society? And how do you, you hypothetical moderate redistributionist you, know that if the state seizes (“surcharges”) more of Ms. Bigbucks’s annual income that she won’t, in order to maintain her currently lavish lifestyle, pay this “surcharge” simply by reinvesting each year less into Bigbucks, Inc. – and thereby harming ordinary workers and consumers overtime?
I don’t know just how descriptive my hypothetical Ms. Bigbucks is of real-world superrich people. But I’m pretty sure that the essence of my hypothetical is indeed descriptive – namely, vast fortunes in market economies are not chiefly stores of consumer goodies; they are, instead, investments in productive assets.