Bonus Quotation of the Day…

by Don Boudreaux on April 23, 2020

in Myths and Fallacies, Seen and Unseen, Taxes

… is this comment by Gwendo V El on this earlier post in which I criticized Yale law professor Daniel Markovits’s proposal for a one-time tax, of five percent, on each American’s net wealth in excess of $2.5 million:

Assets that are traded and therefore priced daily by the market make wealth difficult to determine. That which is 5% of a person’s wealth when there is no attempt to confiscate wealth can quickly grow to 50% or more of a person’s wealth when the selling starts in response to confiscation plans. Good luck with that, monkeys. The minute there’s any serious move to confiscate wealth, it evaporates as the market adjusts to the change in enviroment, including the expectation of downward pressure on asset prices and the expectation of future “one time” wealth confiscations. The value of any asset is the discounted future cash flow it generates and the forecasts for future cash flows will also drop.

What an interesting dilemma we have here. The Fed cranks up the printing press to support stock and bond prices when they fall and this monkey wants to crash asset markets and ensure less future economic activity. Good work! And good luck with that.

DBx: In a modern economy, nearly all wealth is produced, maintained, and increased through an on-going competitive market process. Alter that process and you alter the river of wealth that is produced and volume of the wealth that exists. Contrary to the way most people think of wealth – people including economists and law professors at elite institutions of higher learning – wealth is not a blob of stuff that is stored somewhere and grows on its own.

Too many people do not understand this reality. They are misled by their own smallness as a consumer in a vast economy. Dick and Jane Jones correctly understand that if $1,000,000 in cash were stolen or seized from Jeff Bezos and given to them, then they’d be able to buy $1,000,000 worth of goods and services, and Bezos would be able to buy $1,000,000 less. Dick’s and Jane’s living standards would indeed improve noticeably and, in this particular example, Bezos’s living standards would remain utterly unaffected.

But to draw conclusions about the economy and about policy from such juvenile fantasies is to commit several fallacies, foremost of which is the fallacy of composition. The larger the scale of wealth confiscation ‘redistribution,’ the greater the reduction in the total market value of capital – a reduction that reflects both the reduced security of capital ownership and the reduced productivity of the economy.

If the Piketty and Zucman view of wealth were correct, then ‘redistribution’ would cause no reduction in the total market value of wealth. In this economically mistaken view, existing wealth is a blob of stuff, created and maintained independently of human action, with an objective value set by…. well, we’re never really told by whom or by what. The only policy question is who gets to own it.

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