Soaking the Rich? It Could Backfire for Progressives

(Bloomberg Opinion) -- What is the purpose of taxing the rich? Most economists would answer that the goal is to get revenue for government to spend on things that benefit society -- roads, schools, health care, housing and aid for the poor. The argument is grounded in the theory of the diminishing utility of wealth. If you take $10 million from a billionaire and split it among 1,000 poor people, the billionaire will barely notice the loss, but the poor people will see a big improvement in their lives by getting $10,000 each.

That’s the standard argument for redistribution. It definitely seems to represent the policy choices of social democracies like Denmark and Sweden, which have very high taxes and levels of social spending. But recently, some on the political left -- including some prominent economists -- have begun to make a very different argument. It’s not about raising money, they say, but because discouraging people from amassing great fortunes in the first place makes society a fairer, more equitable place.

In a recent op-ed in the New York Times, economists Emmanuel Saez and Gabriel Zucman make this argument:

[The] root justification is not about collecting revenue. It is about regulating inequality and the market economy. It is also about safeguarding democracy against oligarchy…An extreme concentration of wealth means an extreme concentration of economic and political power.

The notion here is that the affluent use their wealth to control the political process. A second idea, suggested by Saez and his famous co-author Thomas Piketty, is that low tax rates prompt top earners to press harder for higher salaries.

If one or both of these theories is true, then simply depriving the wealthy of much of their incomes or assets would have a beneficial effect on society through a kind of trickle-down process -- free from the malign influence of the plutocrats, the political and corporate systems would become less tilted, as space opened up for workers and voters to fight more effectively for their own interests.

These theories are highly speculative. There’s currently not much empirical support for the bargaining theory, which runs counter to standard economic theories of wage setting (in which higher taxes tend to lead to  higher before-tax salaries). Nor do most well-off people bargain for their riches -- instead, they tend to be the owners of companies and set their own pay. There’s also scant evidence about how much billionaires dictate the political process -- it might be a lot, or it might be only a little. The example of Japan, which has very few billionaires, but where powerful corporate and rural interests tend to get their way, and where redistributive economic policies are sparse, suggests that simply getting rid of the moneyed elite might not be sufficient to ensure a more egalitarian government.

In the end, Saez and Zucman’s argument comes down to the conviction that inequality -- which the two economists have spent their careers studying and quantifying -- is an inherently bad thing. If this is true, destroying the wealth of the upper class would be an end in and of itself, even if it doesn’t better the lot of the poor or middle class.

The idea that eliminating concentrated wealth is its own reward fits the political zeitgeist of the U.S.’s emerging anti-capitalist left. Dan Riffle, a policy adviser for Congresswoman Alexandria Ocasio-Cortez, declares that “every billionaire is a policy failure.” Journalist Tom Scocca asserts that “we should presumptively get rid of billionaires,” because “no one deserves a billion dollars.”

Thus, we may be witnessing the emergence of a new left-populism, distinct from the redistribution-focused progressive liberalism that has traditionally prevailed in the Democratic Party. For now, left-populism and progressive liberalism aren’t really in conflict -- both want higher taxes on the rich, just for different reasons. Nor do left-populists oppose traditional liberal ideas of strengthening unions, raising minimum wages, increasing anti-poverty spending, ensuring universal health care and improving infrastructure and education.

But the differing emphasis of the two approaches may eventually create disagreements over which kind of taxes to employ. For traditional progressive liberals, the measure of a tax is how much revenue it raises -- thus, they’ll be drawn to ideas like value-added taxes, or higher income taxes on a broader swath of the affluent, which are good at filling government coffers. Left-populists, however, will want punitive taxes on very high incomes or wealth concentrations, even if these don’t end up raising much revenue.

Ultimately, left-populists will be tempted to pay for government spending with deficits. This will naturally push them toward embracing modern monetary theory, a popular new idea that asserts that fiscal spending is funded by government money creation rather than by tax revenue. If that theory turns out to be flawed, and ballooning deficits eventually create inflation that the government can’t easily control after it gets started, the result could be a rapid and devastating economic collapse.

If the people of the U.S. desire left-populism, then so be it -- citizens have a right to soak the rich if they so choose. But it’s a strategy with uncertain benefits, which may eventually start to interfere with more traditional progressive priorities such as income redistribution and a larger safety net. The left should think carefully before starting down the populist road.

To contact the editor responsible for this story: James Greiff at jgreiff@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

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