The Capital Note

Warren’s Wealth Tax and the Return of Feudalism

Sen. Elizabeth Warren (D., Mass.) questions a Biden nominee in a hearing on Capitol Hill in Washington, D.C., February 24, 2021. (Greg Nash/Reuters)

Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: Warren’s wealth tax, SPAC glamor, Puff Bar’s defiance, Subway’s sandwich deal, and autocatalytic inflation. To sign up for the Capital Note, follow this link.

Warren’s Wealth Tax
Once again, Elizabeth Warren is raising the topic of a wealth tax, not because (I suspect) she thinks it is feasible quite yet, but simply as part of a longer-term strategy designed to pave the way for the introduction of such a tax sooner or later. After all, according to this New York Times account:

Polls have consistently shown Ms. Warren’s proposal winning the support of more than three in five Americans, including a majority of Republican voters.

In fact, follow the link and you’ll find that only one poll is directly cited, a Survey Monkey poll from November 2019 of 2,672 people, but there is a reference to an earlier Survey Monkey poll showing support for such a tax, and other polls have shown something similar.

The only significant category of holdouts, according to Survey Monkey, were Republican men with college degrees. Well, it is a start.

Warren being Warren, a politician with more than a touch of a show-trial judge about her, adds some poison to sweeten her prescription:

A wealth tax is popular among voters on both sides for good reason: because they understand the system is rigged to benefit the wealthy and large corporations.

In fact, the system is so rigged in favor of the rich that America can boast (checks notes) the most progressive tax system in the OECD.

Here’s the Manhattan Institute’s Brian Riedl (a Capital Matters regular, too) writing for the Daily Beast in late 2018 (the Trump tax cuts had been passed the year before):

In fact, America’s federal tax code is already the most progressive in the OECD, even adjusting for income inequality. The Congressional Budget Office reports that the top-earning 20 percent of taxpayers earn 53 percent of the income, yet pay 69 percent of all federal taxes, including 88 percent of all income taxes. The bottom 40 percent of earners earn 14 percent of the income while collectively paying no income tax, and less than 5 percent of all federal taxes.

Or here’s Demian Brady, writing for Capital Matters in February:

Despite the rate reductions under the TCJA [the Trump tax overhaul], the tax share of the top 1 percent increased compared to 2017. In fact, the National Taxpayers Union Foundation has compiled historical IRS data tracking the distribution of the federal income tax burden back to 1980, and 2018 was the highest share recorded over that period.

The top 10 percent of filers, those with adjusted gross income of $151,935 or higher, paid over 71 percent of all income taxes. This was also the highest share recorded in the data available since 1980.

The reason that a wealth tax is as popular as it seems to be is a combination of resentment of the hyper-rich (not exactly a new phenomenon, but currently sharpened by just how rich some of these people have become) and relief at the thought that this is a tax that will be paid by other people.

After all, as is explained in the New York Times:

Ms. Warren’s wealth tax would apply a 2 percent tax to individual net worth — including the value of stocks, houses, boats and anything else a person owns, after subtracting out any debts — above $50 million. It would add an additional 1 percent surcharge for net worth above $1 billion.

But that is always how such taxes originally win enough support to enter into law. Most voters don’t worry because they think that these levies are someone else’s problem. Then again, back in the day income taxes were just for the rich too. When a “permanent” income tax was introduced after the passing of the 16th Amendment, there were not many victims, and they didn’t suffer much. Less than 1 percent of the population paid income taxes at the rate of only 1 percent of net income. I understand that changed.

Once the principle of a wealth tax is conceded, and the tax has been introduced, Warren’s thresholds will probably be cut, and will certainly be eroded by inflation. They will also be copied at the state level. That will add to the burden paid by the very rich, but, I suspect that in the states that introduce wealth taxes (or near equivalents, such as the suicidal unrealized capital-gains tax being proposed by some in New York) the thresholds will be much lower. In addition, it should be remembered that all homeowners already pay real estate taxes, which are a form of wealth tax, even if only levied on a relatively small portion of (for the rich) their assets.

What’s more, many of those who do not have to pay the wealth tax(es) will be subjected to intrusive paperwork requirements to prove that they have not crossed the threshold where the tax becomes due.

As I wrote last year (on the topic of a possible wealth tax in California):

A tax on wealth is also an attack on privacy. To start with, all those subject to the levy will have to list everything they own. More than that, I suspect that those who might be liable might, if only as a precautionary measure, feel compelled to furnish the state with a schedule of their assets, a process that we can be sure will, in due course, be repeated further and further down the rich list.

If there is one constituency that will appreciate the introduction of a wealth tax, it is made up of fans of the panopticon state.

And if that sounds creepily totalitarian to you, your instincts are sound. In his must-read survey in yesterday’s Capital Matters of some practical objections to the wealth tax, Robert VerBruggen rightly points out that “many countries have ended wealth taxes after trying them”, and with good reason. One critical difference, however, between, say, Sweden, which abolished its wealth tax in 2007, and the United States, is that, greedily and unusually, the U.S. imposes its tax on its citizens wherever they live, a melancholy distinction it shares only with Eritrea. Swedes who wanted to avoid their country’s wealth tax could, in essence, just move elsewhere, something that is not too difficult for the rich and the entrepreneurial. And many did just that, with unhappy consequences for Sweden’s prosperity.

Moving abroad, however, will not do the trick for Americans. They would need to give up their citizenship too. Renouncing citizenship already comes with an exit tax (to oversimplify, on unrealized capital gains on assets above a certain level, and there some other levies too), but as Robert explains, that’s not enough for Warren, who would raise the exit tax on those subject to her wealth tax to 40 percent. It is not comforting to know that these exit taxes bear some resemblance to the Reich Flight Tax (Reichsfluchtsteuer), introduced in the dying days of the Weimar Republic to discourage capital flight (a bad tax later horribly abused by the Nazis).

In his article, Robert raises some practical objections to the proposed wealth tax. He also notes this:

Conservatives tend to recoil at [plans like Warren’s] for a number of reasons. For one, the federal government already taxes people’s money as it comes in, through taxes on income, capital gains, inherited estates, etc. A wealth tax hits people merely for keeping their money after it’s already been taxed, which just seems wrong.

Indeed, but what it comes with it is profoundly sinister, from the assault on privacy to the idea of imposing an exit tax to cage people in. That conjures up images of a dystopian future, but it is also in keeping with the principles of a pre-modern past profoundly antithetical to the founding ideals of this country.

As I have argued before, a wealth tax is a sophisticated, lighter touch derivative of feudalism, but the core of it is undeniably the same: Even if only contingently, the state (“the king”) has, theoretically, a call on everything a citizen owns.

Squaring that with the idea of a free society is not . . . straightforward.

Around the Web
In yesterday’s Capital Note, Daniel Tenreiro provided an excellent overview of what SPACs are, and how they work.

For another glimpse into the SPAC universe, here’s Steven Kurutz at the New York Times:

In simpler times, famous-people-turned-entrepreneurs bought wineries or invested in car dealerships — or simply created multi-billion-dollar lifestyle companies on the strength of their family brand.

But in the pandemic economy, there’s a new way for the rich and recognized to flex their status and wealth: through a SPAC. (That’s a “special purpose acquisition company,” but more on that later.)

Jay-Z is involved with one. Shaquille O’Neal has one. Ciara Wilson sits on the board of one, as does Serena Williams.

Sports figures seem especially enthusiastic about them: Alex Rodriguez, Steph Curry and the activist and former NFL quarterback Colin Kaepernick — or should we say, “SPAC-ERNICK” — all have one. So does Billy Beane, the former Oakland A’s general manager and subject of the book and film “Moneyball.”

Websites like SPAC Track and SPACinsider help obsessives keep up on the latest. Political types are getting in on the SPAC action, too. (Former House Speaker Paul Ryan joined one.) And, naturally, there’s a media-crowned “SPAC King” — Chamath Palihapitiya, a former Facebook employee and billionaire investor who posts images of his ripped abs on Twitter and has sponsored six SPACs that raised a total of $4.34 billion, according to Bloomberg . . .

This won’t end well.

Hero entrepreneurs

The Wall Street Journal:Puff Bar Defies FDA Crackdown on Fruity E-Cigarettes by Ditching the Tobacco”

Fancy a mango, watermelon or lemon-ice flavored vape? You are in luck. They are being sold online by Puff Bar, a brand that last year was ordered to take its e-cigarettes off the U.S. market.

The Food and Drug Administration told the e-cigarette maker to stop selling its fruity, disposable vaporizers, as part of a broader crackdown on underage vaping. The brand resumed sales on its website last month and introduced a change that may allow it to sidestep the FDA: Puff Bar says it is using nicotine that isn’t derived from tobacco.

The FDA, which regulates tobacco products and smoking-cessation devices like nicotine gum, said it was aware of Puff Bar’s move. An agency spokeswoman declined to say whether the agency’s Puff Bar ban was still applicable, noting that she couldn’t comment on an ongoing investigation . . .

The FDA’s approach to vaping runs against any notions of a sensible harm-reduction strategy, something that ought to be part of any serious public-health strategy, but that’s a debate for a different part of this website.

A tale of a promotion, franchisees, and a parent company

The Hustle:

In 2008, Subway introduced a tantalizing deal: For just $5, one could purchase any “footlong” (12-inch) sandwich.

Tantalizing for some: Much as I love fast food, the magic of Subway has always escaped me, but back to regular programing:

The promotion was a smash hit with cash-strapped customers during the recession — and its jingle (“five-, five-, five-dollar footlong . . .”) became the company’s calling card.

Within a year, foot traffic skyrocketed across the franchise’s thousands of locations. Revenue from $5 footlongs alone topped $3.8B.

It was, according to many industry analysts, one of the most successful promotions in the history of American cuisine.

But the deal wasn’t so hot for Subway’s franchisees.

Eager to grow at all costs, Subway refused to let the promotion die. As inflation drove up the cost of doing business, the $5 footlong became financially unsustainable for many of the independent entrepreneurs who owned the company’s eateries . . .

Random Walk
Inflation as an autocatalytic process . . .

Like Arnold Kling, I remember the 1970s and, partly because of that, I have a lot of sympathy with this:

I think of inflation as an autocatalytic process. Inflation is naturally low and stable. But it can be jarred loose from that regime and become high and variable. Then it takes a lot of force to bring it back to the low and stable regime.

Another example of an autocatalytic process is a social media platform. If you want to try to build the next Facebook, it is really hard to get started. But once enough people join, then their friends will want to join, so growth becomes automatic.

When inflation picks up to an annual rate of 8-10 percent, it changes your behavior. I know, because I remember the 1970s. When you run a business and you see your suppliers and workers demanding 10 percent more than they did a year ago, you cannot ignore that when you set your price. When you are a worker and see the cost of the stuff you buy going up 10 percent per year, you need to demand a raise just to keep up.

The real take-off point for inflation in the 1970s was the New Economic Policy of President Richard Nixon, announced in August of 1971. He let the dollar “float,” meaning that it depreciated in world markets. In a misguided attempt to stifle inflation, he imposed wage and price controls. In order to work properly, a capitalist economy must have freely moving prices. The controls were a self-inflicted adverse supply shock. Adverse supply shocks raise prices (and recall that the latest “stimulus” is an adverse supply shock on steroids). Although for a little while the price controls repressed inflation, the more enduring effect–the supply shock–went in the other direction. Note, too, that inflation itself is a supply shock, because a lot of the steps that households and businesses take to protect against inflation are steps that detract from productive activity.

Once inflation gets going, the only way to stop it is to slam on the economic brakes. Usually, this means drastically cutting government spending. But in the U.S. in the early 1980s, we slowed the economy without cutting government spending. Instead, the foreign exchange market put on the brakes by raising the value of the dollar, stimulating imports and making our exports non-competitive. And the bond market put on the brakes by raising interest rates, so that nobody could afford the monthly payment on an amortizing mortgage. After a few years of high unemployment, inflation receded.

Most economists attribute these developments to Fed policy under the sainted Paul Volcker. Scott could say that this was exhibit A for monetary dominance. The economic consensus may be right, but I would raise the possibility that the financial markets were the main drivers.

What about more recent experience? As I see it, since the 2008 crisis Congress has been undertaking ever-more-reckless deficit spending, throwing match after match on the firewood, without starting an inflation fire. Maybe that pattern will persist. But if an inflation fire does get going, I will be less surprised than the markets.

— A.S.

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