The Wealth Tax And Our Shared Insanity

I’d describe my life as a largely stress-free endeavor.

Attaining serenity wasn’t easy. At first, it involved waving goodbye (forever) to dear friends like Laphroaig. Then, it entailed an uncompromising exercise in self-reflection and a wholehearted embrace of personal responsibility. In the final act, I decided to avoid inserting myself into the life arc of other people, given my decidedly poor track record in that regard — I’m the butterfly, and when I flap my wings around other people, their trajectory tends to change to a degree that isn’t normally considered commensurate with the influence of a single person.

It’s occurred to me recently that, having attainted something like serenity, it might not be a terrible idea to engage with humanity again (in person, I mean), but with few exceptions, I find that people are astoundingly naive. When they’re not, they’re either nefarious or, perhaps worst of all, smart but unwilling to leverage that intelligence in the service of higher-level thinking, where that means pondering existential questions that often produce uncomfortable answers.

The above might seem like an odd way to frame an article on Elizabeth Warren’s wealth tax, but you’ll humor me.

Warren this week introduced legislation that would apply a 2% annual tax on net worths above $50 million. Starting at $1 billion, the surcharge would be 3%. “The Ultra-Millionaire Tax Act would level the playing field and narrow the racial wealth gap by asking the wealthiest 100,000 households in America, or the top 0.05%, to pay their fair share,” Warren said, in a joint press release with Pramila Jayapal. The measure, she went on to say, “would bring in at least $3 trillion in revenue over 10 years – without raising taxes on the 99.95% of American households that have net worth below $50 million.”

Ok, fine. Or not fine. Depending on who you are. That’s really not the point here.

Regular readers are fully apprised of where I stand on such matters. If you’re worth $50 million or more (let alone $1 billion or more) and you haven’t figured out how to avoid paying most taxes, then you’ve failed as a rich person. You laugh. And you should, because that’s meant to elicit a chuckle. But it’s also mostly true.

We argue vociferously (as a society) about whether it’s “fair” to say that wealthy people “deserve” to be hit with a punitive tax. While there’s no way to answer that definitively when the discussion is couched in normative terms, there is a way to answer it definitively when you think about it from the perspective of “creative” accounting. Again: If you’re wealthy, and you’re still paying taxes, then yes, you “deserve” to be taxed at an even higher rate. Why? Because you apparently aren’t smart enough to have figured out the one ironclad rule of being rich — namely, you don’t ever pay any taxes. Just ask Donald Trump.

I’m exaggerating for comedic effect, of course. The bottom line is just that most wealthy people aren’t paying anywhere near their “fair share,” and everyone knows it. So yes, obviously, they “should” be paying more. If this is the debate, it’s not clear that it’s worth having. Enormous fortunes tend to multiply exponentially, and the larger they are, the more true that tends to be. When you consider offshore accounts, loopholes, and business structures that allow for legal tax avoidance, Warren’s 2% or 3% is meaningless. It’s a rounding error for anyone who ends up paying it, and just like all other attempts to tax the rich, they’ll figure out a way around it (probably via some kind of offset). Warren aims to avoid that with what she calls “robust anti-evasion measures,” but they won’t work.

She’d doubtlessly contend that most of what I’ve just said not only bolsters her position, but is in fact exactly the point — the wealthy won’t miss it, and will probably figure out how to offset it anyway, while the money raised ($3 trillion) could fund (and I’m quoting from the press release), “child care and early education, K-12 [and] infrastructure, all of which are priorities of President Biden and Democrats in Congress.”

On Tuesday morning, Warren made the mistake of agreeing to an interview with CNBC’s “Squawk Box,” which regular readers know I absolutely despise for myriad reasons, not least of which is the fact that if Andrew Ross Sorkin really believed in the principles he espouses, he wouldn’t be able to be in the same room with Joe Kernen without a physical altercation breaking out.

Kernen is insufferable, but on Tuesday, he quizzed Warren using a glaringly obvious line of reasoning. “If you’re going to do 2% on $50 million, and then when you get up to a billion and you’re going to do 3%… why not make it truly progressive and make it 10% at a billion and make it 20% at $10 billion?”

Then, he drove it home: “Why would Bezos do 3% when some poor schmo at $50 million does 2%?”


As you can see, Warren didn’t have an answer. That’s because there is no answer to that question. Her plan effectively equates Jeff Bezos with my neighbors. That’s an absurd false equivalence.

Crucially, it’s even absurd among billionaires (and none of my neighbors are billionaires, by the way). At one point in February, for example, Elon Musk had made six Stan Druckenmillers (plural) in the space of six weeks.

Please, I implore you, take a moment to let that sink in. Musk made (on paper anyway) six times the entire net worth of arguably the greatest investor in history — in the space of around 45 days. The figure (below) is a snapshot from February 15.

Proposals like Warren’s are noble in spirit, but they seem to reflect an almost quaint unfamiliarity with how quickly the very situation she’s trying to address is spiraling. And that’s the real irony here. Warren doesn’t seem to appreciate how acute the very dynamics she’s attempting to curb really are.

And yet, I find that difficult to countenance. It’s not just that Warren is a highly intelligent individual. She also knows Thomas Piketty. Indeed, the structure of her wealth tax comes from a spreadsheet created by one of his students. So it isn’t as if she’s actually unfamiliar with the exponential dynamics so poignantly illustrated in the simple figure (above).

That leads me to believe that even the likes of Warren are subject to what I recently called “the tyranny of practicality.”

Even if Warren (or, for example, the guy you’ll meet if you read “The French Economist Who Helped Invent Elizabeth Warren’s Wealth Tax) were to answer Kernen’s question the only way it’s possible to answer it while preserving some claim to consistency (i.e., by simply saying “You’re right, Joe, there’s something ridiculous about implicitly equating someone worth $51 million with Warren Buffett by taxing the latter at a rate that’s just 1 percentage point higher than the former”), we’d still be pretty far removed from anything that even approximates deeper thinking.

When Warren talks about using the money raised from a wealth tax to “pay for” other things, she’s just parroting fiscal orthodoxy and, inadvertently, speaking in nonsense terms. Before I address that latter contention, let me ask you to consider the following passage from Stephanie Kelton’s “The Deficit Myth”:

There is a strong case to be made for taxing the rich, and we need to do it. But we need to do it strategically, recognizing that the purpose of the tax is not to pay for government expenditures but to help us rebalance the distribution of wealth and income because the extreme concentrations that exist today are a threat to both our democracy and to the function of the economy. Billionaires save their wealth in the form of financial assets, real estate, fine art, and rare coins. A wealth tax might make [an] infrastructure bill appear fiscally responsible, but it makes a lousy offset if the government wants to increase spending in an economy that doesn’t have much available slack. In a deeply depressed economy, this wouldn’t matter. There would be plenty of “fiscal space” because business would be operating with lots of spare capacity and there would be loads of unemployed workers available for hire. But as we get close to full employment, these real resources become increasingly scarce. Once the economy exhausts its real productive capacity, the only way for the government to get the construction workers, architects and engineers, steel, concrete, paving trucks, cranes, and so on that it needs is to bid them away from their current use. That bidding process pushes prices higher, giving rise to inflationary pressures. To mitigate that risk, the tax needs to offset enough current spending to free up the real resources the government is trying to hire. The problem is that because this particular tax is levied on a tiny cadre of uber-rich people, it won’t open up much (if any) fiscal space.

Kelton does support the wealth tax. But as the excerpt (above) makes clear, politicians habitually couch the conversation in the wrong terms, partly due to the tyranny of practicality (presenting a wealth tax as a way to “pay for” infrastructure or expanded education at least addresses deficit concerns, even as Republicans despise the idea of taxing large fortunes).

The problem with that is clear. If the economy ever does claw its way back to something like full capacity, taxing rich people isn’t going to ameliorate inflationary pressures. Just because you “pay for” something like a multi-trillion-dollar infrastructure push doesn’t mean it won’t be inflationary. The crucial point is the economy’s “speed limit,” not any imaginary budget constraints.

But even that higher-level thinking doesn’t go far enough for me. And this is where I bring the discussion full circle to where we began some 1,600 words ago.

All of these discussions are, at heart, couched in nonsensical terms. To be sure, it’s refreshing when someone like Kelton comes along and lifts the veil for the masses on something as crucial as federal government financing in developed, currency-issuing economies. She’s done the world an incredible service and we’re all in her debt, especially to the extent her advocacy ends up manifesting in more utilitarian outcomes for a society that’s rife with inequality.

That said, in order to truly break free from the trap that causes us all to traffic in nonsense on a daily basis, we have to realize that all of these discussions are rooted in myths.

Money, for instance, is everywhere and always a myth. Inflation doesn’t come about “because” we hit some “speed limit” or some “capacity constraint.” And, with the utmost respect to Harley Bassman (who regular readers know I’m very fond of), it doesn’t come about due to “the excessive creation of fiat currency” either.

There is no quantifiable line in the sand marked “excessive.” And there are no “speed limit” signs. It’s true that lumber prices will surge in the event there’s huge demand for new homes and not enough wood to build them with. People will bid up the scarce wood. But that’s a narrow example. Sure, it can become less narrow. As Kelton suggested, a broad-based infrastructure initiative implemented when the economy is already running hot could result in price increases for all the goods and services needed for building and construction.

But let’s dig a little deeper. All of those considerations accept that there’s something real at the bottom of this. But there isn’t.

Spiraling, across-the-board, hyperinflation — e.g., the visceral images of people wheeling in cartloads of paper money to pay for a single loaf of bread — can only come about if people lose confidence in each other’s belief in the value of something that had no value in the first place. The value of the currency is derived from the strength of that confidence network. Nothing else. You believe the dollar has value because you know I believe it. And I believe it because I’m confident the next person believes it. And so on.

That confidence isn’t the result of scarcity. The fact that the government demands it in taxes helps legitimize a given currency (e.g., by creating demand), but it’s not the source of the confidence either. Confidence in money, like confidence in anything else that’s not real, is built over time. Like the triumph of monotheism, the “victory” of the dollar is a historical accident. It could collapse tomorrow or it could reign for several more millennia. We have no idea.

What we do know, using the example of religion, is that irrefutable empirical evidence to suggest that something is a fairy tale is certainly not sufficient to undermine the myth. The same people (us) who set foot on the moon still believe in Creationism. The same people (again, us) who understand the basics of how the solar system works, still go to church every Sunday to worship a water-walking wizard. Those are incredible feats of cognitive dissonance.

If we can persist in that state of insanity, then there is absolutely no reason why we can’t, for example, simply conjure up $10 trillion and rebuild the nation’s infrastructure, or fund universal healthcare, or whatever else we want to do, without taxing anyone and without causing hyperinflation.

The idea that people’s faith in the dollar is going to be shaken by presenting the public with a calculation showing that historically, it’s dangerous to create money at a rate that exceeds economic growth, seems inconsistent with how the public processes other such evidence.

The paradox is always the same. These myths (e.g., money, religion, etc) are the glue that holds society together. It’s true that arguments about them divide us, but that division is within the existing system of shared fairy tales.

If we abandon those myths, conversations like that between Kernen and Warren wouldn’t make any sense. They’d just be gibberish. Similarly, if the threshold beyond which money creation triggers inflation has nothing to do with “capacity” or any “speed limits,” but is instead akin to asking when westerners will stop believing that the historical Jesus was a magic wizard, then MMT isn’t much use.

Want to fund child care and early education? Great. Just fund it. You don’t need to levy extra taxes on anybody. And you probably don’t need to ask any questions about capacity either.

Is the price of bread or vanilla ice cream or some item that has nothing to do with an idiosyncratic supply-demand dynamic (e.g., the lumber example) going to skyrocket overnight because the US government created a trillion new digital dollars to send kids to Kindergarten? I seriously doubt it.

If you don’t like my reasoning on that, Iet me win you back by posing the converse question, which is this: If a large subset of Americans suddenly loses all confidence in the dollar, would restoring that confidence be as easy as saying “Look, that $3 trillion we just created was actually net zero because we taxed it back from billionaires?” Again: I seriously doubt it.

Another thing I seriously doubt is whether persisting outside of these myths, as I do, is conducive to having any real-life interactions with people. But that’s fine. As noted here at the outset, I don’t have a good track record with in-person interactions.

And besides, I’ve got you, dear reader. What do I need with anybody else?


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34 thoughts on “The Wealth Tax And Our Shared Insanity

  1. first, love inclusion of JS Mill ( utilitarian outcomes) – long time gone from American discourse and time to revisit (or a modern version even better!); second, with accepted myths (e.g., religion and dollar value), breakouts (excursions) are required into a new operational zone (new normal). A catalyst other than war, famine or natural disasters have seldom broken thru cultural spc (mythical belief) hi / lo bands. Worse, we Americans seem to have given up our love and ability for deep, honest intellectual discourse to bring any change. Let the next crisis rage!

    1. … and regardless of how hard people like H try to engage us in discourse … the majority just turns on the TV (metaphorically) and follows along.

  2. And it’s important to remember how faith in a national currency tends to be lost historically because it is not some trivial action. When a country cannot produce the basic goods of necessity nor anything of sufficient value to trade internationally then it cannot by printing any amount of money nor by ceasing to print money manage to restore confidence because no other country is interested in supplying you everything you want for nothing but some paper that they don’t need because they don’t pay taxes to your government.

    Germany being the classic example post WWI as it had to export everything it produced just to cover its war debts to the allies. Printing money at that solution does nothing but then neither does not printing money.

    Any country that has natural resources capable of becoming goods and services sufficient to sustain its people can print money all day long without hitting hyperinflation. It could easily blow some bubbles depending on HOW that money is distributed but that’s what we’re doing today. It could also address real issues and solve real problems. Wealth taxes in as much as they are needed serve a simple purpose, stop dynastic wealth accumulation and political interference. Wealth above certain level needs to decay at least as fast as typical market returns for that kind of wealth and so the tax above say $50 million needs to be pretty high and realistically asymptotic from there. Democratic society cannot coexist with living gods who hit escape velocity on the rule of law.

    The critical part that is really the way to get to a place where you can even discuss wealth taxes is things like debt relief and UBI. I’d start big. Really Big. $10+ trillion annually big. I mean for all the stimulus we added last year what actually happened beyond some saving and retail therapy? After people have some stability there might be appetite and energy for wrangling the wealthy.

  3. While I’m not fond of parasocial relationships, I appreciate when you provide glimpses of the man behind Heisenberg.

    Regarding the rest of the content, I won’t get tired of pointing out the flaw in MMT reasoning and econometrics as a whole. Both rely on the premises that we can describe causal relationships, along with the influence of specific variables leading to expected outcomes and the fact we can obtain accurate information regarding prices/the economy.

    Even if these previous problems could be solved, bureaucrats would still be in charge of making these decisions using equilibrium models and linear regressions which have failed again and again throughout any major crisis.

    1. seems like we would have learned that this practice is a bust, copy: decisions using equilibrium models and linear regressions which have failed again and again throughout any major crisis.

  4. Gene Roddenberry would agree.

    When “money” meant physical gold or physical silver, the supply of “money” had (physical) limits. Napoleon wanted gold for “Louisiana.” Russia wanted gold for Alaska. These constraints no longer exist. Why not follow Roddenberry’s lead?

  5. The trouble with no longer “acting out” a “fiscal constraint” or “justify a trade off”

    Is that there will be an exponentially increasing amount of people who start to realize they can vote whoever is willing to print more money to “give out”, and the people who are diligent will stop keeping their price stable for their honest work

    It will be a spiral sooner than later.

    Hence, leaders must “act” so the masses know that “things are still as before” ( although it is no longer at an increasing rate with each decade ) although u can count on the developing countries leaders to always be “hyper-inflating one step ahead of the USD” … and maintain a relative sense of “things as before” in reverse

  6. “If we abandon those myths, conversations like that between Kernen and Warren wouldn’t make any sense. They’d just be gibberish.”

    You know, i initially signed up here after Kelton endorsed you on twitter, and i’ve stayed for the market analysis, but i really think you’re at your best when you’re wading through the existential murk.

    I just discovered Wittgenstein last year (im a late bloomer i guess), and your description of how many of our public discussions are trapped in these linguistic knots, and not reflective of actual problems, really resonates.

    Y’know, you’re close to mirroring the themes of the “Superstructure” podcast by a few MMT acolytes in Kelton’s orbit — which is essentially examining public socio-political myths. I won’t go so far as endorsing it, it can be a bit eccentric, but just saying you’re not alone. I hope you’ll keep devoting some time to this more abstract stuff in the future.

  7. Spiritual experiences are observed by many people and in many cases these observations are probably not tricks conjured up by the central nervous system, like the dollar obviously is. People can be faulted and disparaged for admitting their observation but keep in mind that such observations do not require sharing and can be independent of any learned behavior, unlike the dollar.

  8. I’m not sure how you do it, another great article. Compared to you or most if not all of the commenters around here, I’m a relatively smooth-brained individual. Thank you for adding some wrinkles.

  9. H-Man, your note travels with your other classics. Lot to digest, similar to a brunch in New Orleans. Not sure I am all in on the money myth but the religion myth, count me in. Seems that cognitive dissonance could be a good thing for the mind.

  10. Well done sir. I cannot fault Musk or Bezo’s….they aren’t buying their stocks….people with not even a fraction of their wealth buy, even when Musk tells you it’s overpriced. The Pagoda misses you.

  11. As an aside from the economic theory… If you believe in the ‘Big Bang’ ,and I think most scientific thinkers accept that this is for real, then you probably have no problem in realizing that there was not one life form in the universe at the time of the ‘Big Bang’. All life that developed after that explosion exists in the form of a collection of cells. One or many. Where did the first cell come from?? DNA is not life. It is the shape life takes. In all the laboratories in all the Universities around the world there is not a single case of making life out of nothing. Where nothing is anything not alive to begin with. So mankind in all societies came up with ‘fairy tales’ to explain the unexplainable. All they have to do is make a cell that will replicate to make another cell. How hard can that be?? I tend to believe in a grand experiment by a superior being without end. If there is life after death… bonus.

    1. Do a search for “synthetic biology” or “BaSyC.” There is a substantial research community researching the problems you discuss. Depending on what your definition of a synthetic cell is, it might already exist. But creating a synthetic cell doesn’t tell us how the first cells arose. May I suggest that the leap from RNA and ribozymes in a primordial soup to a cell is not so great–the ingredients that humans have trouble comprehending are time (as in hundreds of millions of years) and the inexorable force of natural selection.

      But if you want to believe that God packaged nucleic acids and proteins in a lipid membrane, be my guest.

  12. H. can blow my mind with the quality of his writing, how he produces the gems like those found in this article with such regularity really is a little bit shocking to me at times.

    I buy his monetary reasoning even as there is no market within my sphere of influence, to sell it into.

  13. Very enjoyable piece.

    Leaving the policy argument aside for a moment, and while I am no fan of taxes, seeing the uber wealthy pay more would not much bother me, the Wealth Tax as proposed by Senator Warren is very likely unconstitutional. Chief Justice Roberts wrote in his Obamacare opinion, and cited precedent, that taxes on property are direct taxes. The Constitution requires direct taxes to be apportioned by state population. This has basically killed all direct taxes in USA history. Even the income tax required an amendment.

    I’m always interested in other views.

    1. So suppose we start taxing (income tax) unrealized capital gains. That would open a whole new can of worms but is not that much different than a wealth tax.

        1. Bob, thanks. I’ve been thinking about the issue of taxing mark to market as well, or as you note, unrealized cap gains. I’m not sure that is Constitutional either. It’s not income because there is no sale event. It’s not a cap gain either. It’s really just another property tax and therefore a direct tax. Direct taxes are Constitutional as noted above. It’s just the weird way the Constitution says that such taxes must be applied based on a population of a state which essentially prohibits them on a practical basis.

          This is a real issue that would tie up any of these taxes for years. And I think that they will not clear the Constitutional hurdle.

  14. Terrific, fascinating, thank you. Thinking about the differences between the macro (Newtonian) and the Quantum(physics) scales regarding ‘economic rules’ , as we go from individuals to planets. At what point (scale) does a new regime of rules start to apply. There is no grand unified theory in Physics as yet. Less so understanding of the granularity, location and scale (the topology) of MMT in the ‘ecosphere’ (if thats anything more than a contingent prop). If in some future there was pretty decent UBI , free healthcare, green deal and science based governance,so that people were immune from real and unnecessary hardship maybe the ‘market’ could be enjoyed as a giant ludic videodrome (to borrow Cronenberg). [Of course pure Algorithms would have to compete under weight-for-age, handicapped differently to the cyborg athletes, themselves scaled according to the nature of their drug use and so on] . Not sure if we’ll get there… 🙂

  15. While in absolute terms H is right by tautology –money is just a construct and only has value because of our faith in the strength of other people’s faith–, Kelton’s work on finding the limits of money creation is still powerful and worth understanding.

    She’s finding and exploring the actions that can be taken within the limits of our faith in money. The consequences of the religious’ stopping believing in a water walking wizard are far tamer than the consequences of your grocer’s stopping believing in the value of your money.

    The premises “money has value” and “there exists a water walking wizard” are both false. Asking when people will stop believing them isn’t equally unimportant. Ok, if we were royalty in the middle ages they would be equally important.

    At the heart of MMT is: what’s the most that public and monetary policy can do before we have a regime change?

  16. We here on this site (writer and commenters) have the luxury of not needing to actually persuade anyone.
    Elizabeth Warren, on the other hand, is actually trying to effect change. To do this, you have to get your hands dirty. She will speak the language that people are used to hearing as part of the effort to effect change. My only problem with this is that Elizabeth Warren of late doesn’t seem as sharp as the Elizabeth Warren of 15 years ago. She was great as an outsider, but the compromises of being a Senator, or maybe just time/age, seem to have taken something away from her abilities.

  17. You took a big risk in the opening. You let yourself be a bit vulnerable. It’s OK. Thanks for organizing your thoughts and analysis and sharing. The little bit of optimism left in me says espousing ideas consistent with the ones you typically provide are the sprinkling of seeds that may someday turn this ugly weed bed in which we live into a beautiful garden.

    I’m also an econ and poli sci person. Not at your level but close enough to follow, synthesize and repeat. I also, in early adulthood and since, have had exposure to the very wealthy and the uneven playing field that they typically enjoy. When I was 12 my father, who was a welder by trade, paid more in actual dollars in taxes than Richard Nixon. That was my start of realizing the unfairness of the economic pitch.

    Thanks Heis. You lift and depress my days at the same time.

    We need to put your writing in every economics department at every learning institution.

  18. Well done. One of the great political divides in our country is beween curious, questioning people and those who fear and hate them. Couple this with the legacy of the civil war, and you get really angry crazy politics. Who coined the phrase Those who know don’t say, and those who say don’t know?

  19. H

    Sir, you outdo yourself once again. As Neil Gaiman seems to se it, our gods have always come into exstance because we believe in them and when we stop believing in them they lose their power, fade, and eventually disappear. It will be interesting, albeit scary, to see what happens when more people believe in Bitcoin than dollars. I’m not looking forward to that tipping point, in the models of Rene Thom, the catastrophe that will erase our money, more quickly than we might think.

    For this piece you were more expansive in defining your set of myths and no one seemed to register any great disagreement. Outstanding set of comments, btw. For me the irony is that as we think about our main god, money, our cultural upbringing forces us to put limits on what we see as the need to pay back public debt, avoid deficits, etc. We can’t get by those economic myths. The give and take on this is so fun to watch.

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