Tax Luxury, Not Wealth Or Income

I favor very high marginal tax rates on the super rich, say 70% to 80%. But I am also opposed to all income taxes and all wealth taxes. Why?

Let’s start with the conservative argument that taxes on the super rich will deter work, saving, and investment, by reducing the incentive to build more wealth. Is it true? The answer will depend on the type of tax.

If you look at the behavior of superrich people like Bill Gates and Warren Buffett, they tend to spend only a few extra pennies on consumption, for each extra dollar they earn. Thus it does not seem like extra consumption is an important motivation for the superrich, beyond a certain point. So perhaps high taxes are not a disincentive.

Warren’s (relatively) modest house

Ah, but you might argue that they have other motivations. They like to be big time philanthropists, or they like to build their business empire up to greater and greater heights. That’s their real motivation, and a punitive tax rate would therefore discourage them from putting in the extra effort that we want to get from talented people. I agree.

But that proves my point! You don’t want a punitive tax on income or wealth; you want a punitive tax on very high consumption—say beyond $50,000,000/year. Gates and Buffett would still be able to use their income for charity and investment purposes, with almost no deterrent effect from high taxes. They’d only be punished for an excessively lavish lifestyle.

Now admittedly there might be a few billionaires that would be deterred by a high consumption tax, say Larry Ellison. But even there, the deterrent effect would be less than you might think. That’s because a lot of the high-end consumption is positional goods.

Let’s suppose that currently the biggest yacht is a 400-foot monster, and Larry Ellison wants a 500-foot one—to impress his friends. Also suppose that a steep consumption tax prevents Larry from getting this mega-yacht. You might argue that this reduces his utility, and would discourage his effort to make Oracle the best company it can be.

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Gary Anderson 8 months ago Contributor's comment

This is such a good idea, Scott. Hard to track, maybe. Maybe people could cheat. But most wealthy people would probably be ok with it. Thanks.

Dick Kaplan 8 months ago Member's comment

I agree. A surprisingly simple idea that could work. At least better than what we have now.