We often hear that inequality in wealth is rising across the globe. This is undoubtedly true. For example, income inequality in the U.S. last year reached its highest level in more than half a century due to the post-GFC economic expansion disproportionately benefiting the wealthiest Americans. The so-called Gini index, a key measure of wealth distribution, rose to 0.485 in 2018, from 0.482 a year earlier, with states such as California and Texas experiencing the biggest jumps.
But is inequality actually a bad thing? Academics, politicians, the poor and some of the rich have argued that it is deeply unfair for there to be high levels of inequality. Thomas Piketty has argued that governments should step in by adopting a global tax on wealth, and Senator Elizabeth Warren has made a wealth tax a centerpiece of her presidential bid for 2020.
Perhaps I haven’t studied this issue enough. Certainly it’s outside of my realm of expertise — I am an expert in equity investing but have no such claim on pretty much anything else. But I have a vested interest in the discussion given where I stand within the socioeconomic hierarchy, and I have a few questions that I think need addressing.
First, stripping a certain amount of wealth from the already wealthy is different from stripping it from an up-and-comer (i.e., someone who is on the path to becoming rich but who isn’t yet there.) Applying a 50% marginal tax rate on personal income and a 2% wealth tax on someone with a billion dollars (U.S. dollars, not Zimbabwean dollars) would have almost no impact on his well being. He is not going to be relying on a soup kitchen if his net worth goes from $1 billion to $980 million and he’s forced out of the Tres Commas Club. And it matters little to him in practical terms whether he receives $1 million in salary or nothing. But let’s take a person who has a net worth of $3 million, is married with a couple kids, and is making $500,000 in salary and $50,000 in passive income (dividends, interest, capital gains, etc.) per year. That person is undoubtedly comfortable. He could probably retire today and still be OK for the rest of his life, if he decided to live modestly. By conventional standards he is “rich”, a part of the reviled “1%”. No one feels sorry for him. But he will feel the weight of any increment to his tax rates much more than the billionaire will. The point is, even among the rich, there will be massive disparity (i.e., inequality) in terms of impact of changes to tax regimes.
Second, how can a wealth tax even be implemented in the first place? Theoretically you could have every resident submit a list of assets and liabilities (a balance sheet) to the tax authorities every year, then apply a 2% wealth tax on any net worth above $50 million. But asset prices change on a minute-by-minute basis. You might be worth $100 million today and get 2% of it taken away by the tax man, but if a recession hits the next year and your net worth is halved, wouldn’t that mean you got hit with a double whammy? Why should you have to pay $2 million on a net worth that can move around so much on account of both controllable and uncontrollable factors?
Third, why is it that inequality of wealth is considered evil while inequality in other areas are not? Some people are ridiculously good looking, for example. Brad Pitt, George Clooney, Tom Cruise would fit into this camp. Others are not so lucky. Macaulay Culkin and Haley Joel Osment used to be cute child stars but have been ripped as having gotten ugly as adults. Now, would you be OK with disfiguring Brad Pitt and giving free cosmetic surgery to Macaulay? I’m sure the answer for most people is no. What about inequality in IQ? Some people are born geniuses or with extraordinary gifts (Albert Einstein, Elon Musk), others are born with Down Syndrome. Should we lobotomize Elon to dumb him down and level the playing field? Obviously no. So again, why is being rich — especially if you built the wealth yourself from scratch like Howard Schultz (of Starbucks fame) did — such a bad thing?
Finally, shouldn’t we consider the impact of artificially tamping down wealth inequality on motivation? After all, what’s the point of working hard when an ever increasing proportion of it is siphoned away by the government and redistributed to those who (from his perspective) didn’t work as hard. It’ll dampen appetite for taking risks and for starting new things, things that could be helpful to society such as a launching a new business.
