On Taxing The Rich

The last few weeks have been very interesting. The Canadian election is underway and the American democratic primaries are underway. The idea of universal basic income has been thrown around by Andrew Yang and Single Payer Healthcare is on the tip of every democrat’s tongue. (Disclaimer: I’m very pro universal healthcare and making sure every person has enough to live a fulfilled life.)

Every time this comes up a dialogue that sounds kind of like this ensues.

Person 1: “That all sounds great, but how are you going to pay for it?”
Person 2: “Well, that’s easy, we’ll tax rich people. Did you know Jeff Bezos has a net worth of over 100 billion dollars?”

This aligns well with a sort of zeitgeist thing that occasionally pops up on twitter portraying Jeff Bezos as a dragon for hoarding his wealth.

The thing about the “ultra-rich” is that most of their money doesn’t ever make it’s way into the economy. Jeff Bezos may be worth 120 billion, but in terms of purchasing behavior it’s doubtful Jeff Bezos ever spends more than a few million dollars or so in a year. So that means maybe 119.99 billion dollars of his net worth is effectively not part of the economy. It’s not being spent on iPhones, it’s not getting spent on kumquats, it’s not getting spent on cars, rent or lunches. Say we somehow managed to tax that wealth and put that money back into the economy, there wouldn’t be more kumquats, iPhones, cars or rental units. Presumably everyone in America is already doing something that created economic value, and they’re not just going to be able to do more because more dollars are floating around.

So, somehow taxing half of Jeff Bezos’ net worth and then re-injecting it into the economy would be a net cash injection into the economy. Is that any different than just printing money?

Widget Land

Let’s play an over-simplified thought experiment. There is a society of 10 people. They all make $10 a year and the society produces 100 widgets a year. Everyone will be able to buy 10 widgets at $1 per widget. This is a perfectly egalitarian society.

Now, let’s change it up. Assume that one of the ten people is a guy named Jeff who makes $200 per year, and has $10,000 in savings. If he spent all that money on widgets every year he could buy 100 widgets at $11, leaving no widgets for the rest of the world. This would be the real world equivalent of Jeff Bezos being a dragon, accumulating all the real economy of a country for hoarding reasons.

This of course is not what happens in the real world. Really even the most conspicuous consumer may only be able to consume 20 widgets in a year (Maybe buy a few cars, and a couple extra kumquats). If our boy Jeff consumes 20 widgets in a year, there are still 80 more widgets to distribute to the rest of folks, who may still spend somewhere between $0.80 and $1.00 on a widget, but will only be able to consume 8-9 widgets on the year. This means of course that Jeff ends up spending about $20 on widgets and has $1080 in savings.

Now what would happen if we said “Jeff has too much money, let’s tax him so that everyone else can consume more. Let’s take 5% of his net worth and redistribute it. That means we’ll take $500 from Jeff and everyone will get an extra $55 more to spend. So what happens? Jeff can continue to buy 20 widgets a year, they just now cost him $146 rather than $20. And everyone else still gets about 9 widgets, they just spend around $7.30 per widget. So, some inflation in the per widget price occurs, but on the net no one is much better or worse off.

This demonstrates two things

1. The economy and “money” are not the same thing. Just because we create more money, whether by printing or taxing, does not mean we have more “things” or for that matter services. We must view this as a more nuanced situation than “Let’s solve this problem by taxing Bezos”.
2. There is a difference between capital and money. Although these two things can in limited amounts be interchanged one for one, when we start to consider them entirely fungible when planning our economy, we’re likely to create unexpected outcomes. (Widgets increase in price from $1.00 to $7.00.)

So what?

So what do we do? In America we live in the richest country at the richest point in human history. We shout agree that everyone deserves to not live in fear of losing their job and being out on the street. People seem to paint this as a rejection of free market capitalism. But it should be clear that communism and a social safety net are not actually the same thing. If the american government decided to print enough money to give the poorest 5% of the population in the United States $1,000 per month that would work out to $192 billion dollars per year. There is over 10 trillion dollars in cash and money in the United States (M2 monetary supply), so the total monetary supply would be diluted by about 2% per year. These people aren’t buying luxury goods. Most of this would go towards basics, and be re-injected into the economy. It would be a very minor tax that no one would actually notice since it doesn’t come out of their bank accounts. Not a well thought out solution, but exemplifies that with enough will, there is a solution.

I’m not an economist. Just my 2 cents.