President Trump’s lower taxes and deregulation have delivered the lowest unemployment in two generations, but Democrats claim his program promotes unfair inequality of income and wealth, which in turn slows growth for everyone.
Democratic presidential hopefuls would raise income tax rates on the affluent, and Sens. Bernie Sanders and Elizabeth Warren advocate wealth taxes to pay for public investments — like student debt relief, free public college tuition and infrastructure — to redress inequality. However, often what they propose would hinder growth without systemic reforms that bludgeon Democratic special interests.
Ms. Warren proposes a 2 percent levy on individual fortunes over $50 million and 3 percent on those over $1 billion to raise about $2.75 trillion over 10 years.
About three-quarters of household wealth may be in liquid assets like stocks and bonds, but their value fluctuates widely with market conditions. If equities were up 20 percent in 2021, and the IRS took $1 million from a taxpayer owning $100 billion, would it give back the money if the market fell 20 percent the next year? Likely not, and this would simply encourage the wealthy to park their hordes offshore and in trusts that make multiple heirs the beneficiaries.
Larry Summers — hardly a spear carrier for conservative causes — points out that history indicates every 1 percentage point increase in income tax rates produces a 0.6 percentage point decrease in taxable income. That implies Ms. Warren’s wealth tax would harvest only $1 trillion and broadly in line with the analyses of other liberal and conservative economists.
One-hundred million a year is not much gain for the headaches of annually evaluating the worth of non-liquid assets like patents and family-held businesses, which the IRS already finds maddening for estate tax purposes.
For those reasons and the disincentives to risk taking and investment, most of the dozen Western European nations with wealth taxes in the early 1990s have dropped those.
Student debt relief makes a lot of sense. About half of college freshmen have been hoodwinked by slick for-profit schools and brand name university admission counselors and faculty into programs they either can’t complete or that lead to jobs with salaries too paltry to pay off the loans.
Society is overinvesting in higher education and not enough in vocational education, but forgiving loans and free tuition would further promote this waste. However, it appeals to university professors who generally support the Democrats’ progressive agenda.
Similarly, the Davis-Bacon Act effectively requires most work on federal-funded infrastructure projects be performed at union wages and work rules. Those raise costs and are a blatant example of special interest politics — unions only represent 6.4 percent of private sector workers so why should they get preference from the government.
Most growth stories of the last generation have been financed by wealthy private investors. Google, Apple and Microsoft were boosted to flying speed with the fortunes Ms. Warren wants to tax.
Also, Ms. Warren wants to break up those up those big companies, but West Coast tech firms finance substantial high-risk basic research in artificial intelligence, direct brain to computer communication and the like.
The rise in wealth and income inequality is likely transitory. The big tech companies Facebook, Apple, Amazon, Google and Netflix are increasingly up against limits to their core markets and already face tough antitrust scrutiny when expanding into other lines.
Many of the new unicorns coming along are novel ideas but hardly path breaking high tech. Uber is just a more efficient method for dispatching taxis, and WeWork is an office leasing business — and if those ever turn a profit, they will bring new efficiency to local markets that need shaking up, lower prices and other basic building blocks of new growth.
As for income, an American Institute for Economic Research study found that the share of income going to the 10 percent of earners has hardly varied from its average over the last century by more than 5 percentage points. Research published by Bloomberg demonstrates that the recent economic recovery has most benefited workers and the poor in the lowest 40 percent of incomes, and workers’ share of GDP — as opposed to property owners — is rising again.
Fairness, like capitalism, has its cycles because the forces depriving and affording workers leverage rise and fall as disruptive phenomenon appear and then dissipate. And the falling unemployment of recent years appears to be the best antidote for rising inequality.
• Peter Morici is an economist and business professor at the University of Maryland, and a national columnist.
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