Wealth tax good for the economy – increases infrastructure key to gdp

Yesterday, a New York Times article explained that proponents of a federal wealth tax hope to address exploding inequality but then went on to discuss the fears of some billionaires and economic policymakers that such a tax “would cripple economic growth, sap the motivation of entrepreneurs who aspire to be multimillionaires and set off a search for loopholes.” A wealth tax will not damage our economy and instead would likely improve it. Here’s why.

When the federal government collects taxes, it doesn’t take the money and burn it.

If the government did that, we might agree that this could hurt the economy. Instead, the government spends tax revenue, pumping it back into the economy and creating public goods, things of value that the private sector would never pull off on its own, like the interstate highway system.

Whatever cost a tax imposes must be balanced against the benefit of the investments the government makes with the revenue raised. For example, federal taxes are a cost for Jeff Bezos, but without the highways that are financed by federal taxes—which Amazon uses to deliver goods—he would not be a billionaire today. This investment benefits all of us, but it particularly benefits those who make a fortune from American commerce.

Today highways and other types of public infrastructure are underfunded, which is just one example of our neglect of public investments. The American Society of Civil Engineers (ASCE) estimated that the U.S. needed to increase its infrastructure spending by $1.4 trillion from 2016 through 2025. The ASCE estimated that leaving that funding gap in place would ultimately hurt the U.S. by reducing GDP by $4 trillion over that period. That’s not efficient for the country as a whole and, in the end, it is not helpful for entrepreneurs either.

Rich people changing their behavior in response to a tax increase is likely to be negligible compared to the benefit of public investments that could be financed with the revenue.

The Times article quotes a piece from former Treasury Secretary Lawrence Summers and law professor Natasha Sarin arguing that too aggressively targeting the rich with tax increases would “degrade economic efficiency and punish success in ways unlikely to be good for the country.” But the good of the country is not served when millionaires fail to pay for the public investments that allow them to get rich in the first place.

Sen. Bernie Sanders’ proposed wealth tax only applies to net worth in excess of $32 million, while Sen. Elizabeth Warren’s wealth tax would apply only to net worth in excess of $50 million. It is difficult to believe that as people see their wealth approach these thresholds they will stop working or investing in numbers significant enough to outweigh the positive impact of the public goods that can be produced with the revenue raised.

The U.S. is not raising enough revenue to make the investments we need.