Monday, November 11, 2019

An American 'wealth tax' would produce a global economic catastrophe

Wealth.  An abundance of valuable material possessions or resources. Property or other material possessions with a monetary value, such as livestock, capital stock, jewelry and precious metals. Money, or things that can be exchanged for money.

In any exchange economy, wealth is a measure of our ability to produce. You cannot give unless you first have. You cannot earn unless you produce. If you produce less, you earn less. If you have more, you can pay more to those who earn by producing more.

The more of anything you have, the less each discrete unit of it is worth. The scarcer something is, the more it's worth. If a scarce something is highly desirable, competition by those desiring it will drive the price up.

There is an immutable truth in basic economics: If you tax something, you will have less of it. We also want to be paid the most the market will bear for whatever we sell while paying the least the market will bear for whatever goods or services we buy. We are an altruistic society but we each act in our own self interest.

The wealthiest Americans are not just sitting on big fat bank balances. No one who hoards wealth holds it for long. Microsoft founder Bill Gates, worth an estimated $108 billion is not just hoarding cash and cash equivalent assets. Most of his wealth consists of stock in his company, Microsoft. He also holds debt in the form of bonds and Treasury securities, real estate, shares in the ownership of capital assets and other valuable items that are not money. Their value is estimated based on what they could be sold for if he liquidated them today.

There are about 750 other American billionaires, and many other billionaires from other countries who hold American assets or who are deeply involved in the U.S. economy. All of those are just like Gates.

Microsoft is a publicly traded company. Anyone can own a part of Microsoft by buying shares of the company's common stock. If you have a 401(k) or some other retirement account that is managed for you by a bank (or some other financial institution), you probably already own some Microsoft stock.

Microsoft stock sells for about $146 (11/12/19) per share. Multiply the total number of shares available by the share price and you get an estimate of what Microsoft the company is worth today. The share price is roughly equal to the expected future net after tax earnings of the company plus any value of capital stock on hand divided by the number of shares. Its price is also subject to the daily fluctuations in the stock market. These fluctuations reflect a dynamic view of investors about the health of the company and its ability to earn money in the future.

A lot of things can affect a company's outlook, including the policies of the governments of the countries it sells its products in and the policies of the country it calls home.

If the U.S. imposed a 6% wealth tax (as proposed by Elizabeth Warren), it will do so to pay for a plethora of new services, including government-funded healthcare, college tuition and student loan debt, universal child care and other "free" stuff.

Those subjected to the tax must raise the funds to pay it because not even Bill Gates keeps $6-$7 billion in checking. Since they would have to convert some of their non-monetary holdings into cash, they'd have to sell them. Selling them would quickly create a large increase in the supply of those and similar assets. When everyone is selling and there are only so many buyers, the prices of the things being sold will begin to fall.

If the average net worth of American billionaires is $50 billion and there are 750 of them, their collective tax burden would increase by 750 x 0.06 x $50 billion = $2.25 trillion, or about the total net worth of about three dozen billionaires.

Some billionaires like Donald Trump are wealthy because of the value of their real estate holdings. Real estate is the most difficult to convert to cash, so selling when they're not ready means selling for less than they could fetch when buyer and seller are both ready to deal. Others, like Jim Walton and the Wal-Mart folks hold real estate and large amounts of capital equipment that are also difficult to sell in less than a year. Bill Gates and almost all other billionaires are also heavily invested in overseas markets or multi-national interests where Americans partner with Mexican, Canadian, Japanese and European concerns. A great deal of planning will go into deciding what to sell, when to sell it and how much to sell it for. This would change how they value their holdings, too. What's worth $100 million today may only fetch $80 million next year.

Billionaires would not be the only people affected by a wealth tax. multi-millionaires and regular millionaires would also be affected. While there are only 50,000 to 100,000 "wealthy" households, even the upper-middle, middle and lower-income classes would be affected because the price of everything will fall.

Bill Gates may be worth $108 billion today, but by the time he and other wealthy Americans sold possessions to pay their taxes, Microsoft stock would not be trading at $146 a share.

How low could Microsoft go? Well, the company is traded on the New York Stock Exchange. A sudden influx of shares for sale in one company would affect the value of the exchange indices that include it. The Dow Jones Industrial Index is one. The Standard & Poor's 500 Index is another. As those indices trade down, the shares of other companies not in the indices would fall too. Why? With a good company like Microsoft selling lower, shares of good companies like Apple, Google and Intel would be sold so that your 401(k) manager can maintain his index-required Microsoft-Apple-Google-Intel ratio. They also trade lower because savvy investors don't buy market-value shares when there are perceived below-market shares available.

Banks, insurance companies, pension funds, large investors and speculators all become affected, making buying and selling decisions that wouldn't have been made before the tax was imposed. Companies are inherently less profitable in higher tax environments, so companies might close offices and factories and lay off workers. With fewer offices, factories and workers there is less income because there's less production. Everything slows down.

Remember, stock prices are a reflection of expected future after tax earnings. Those earnings will be expected to fall, further pressing share values down. We are in a global economy. Many overseas interests are invested in the U.S.economy and any slowdown here always spreads. As the old saying goes, "when the U.S. economy sneezes, the world catches a cold." So a sell-off on Wall Street will trigger sell-offs in London, Paris, Moscow, Sydney, Seoul, Hong Kong and Tokyo.

Keep in mind also that at least $2.25 trillion in assets are being sold into this marketplace. Hundreds of billions and likely trillions more will also be on offer at falling prices. Despite the meticulous planning, such a large influx of assets for sale will create considerable uncertainty. Financial markets flee uncertainty and fly to safety. The safest ports in uncertain times are gold and the debt denominated in the currency of stable sovereign nations. Interest rates will fall, but with the productivity of capital uncertain, economic activity will slow. 

As this cycle repeats itself, Microsoft might be trading so low that Bill Gates is only worth $54 billion. Instead of paying $6-$7 billion in wealth taxes, he's only due to pay maybe $3 billion. Some wealthy households are sure to see their net worth fall to a level where they're no longer subjected to the wealth tax. In fact, the very wealthy will find ways to reduce the value of assets without affecting their true worth.

After what will surely be a short time, government will not have the source of revenue they'd planned on when they promised that plethora of services, especially universal healthcare. Their costs will never go down--they always go up. Then what? Increase taxes? Start the cycle again?

An American wealth tax would result in an unmitigated global catastrophe. Nations that were stable before the tax would likely destabilize. Most at risk would be those who only recently transitioned from developing economies into developed economies. Eastern European and Balkan nations could be cast into deep recessions. South American democracies could devolve into authoritarian states. Resource wars would become more likely.

It may not look exactly this way, but something like this is inevitable.

As former U.K. Prime Minister Margaret Thatcher famously said, "The trouble with Socialism is that eventually you run out of other people's money." It is absolutely true. In every country that has tried it, only misery and human suffering have followed. You cannot tax a people or a nation into prosperity. It has been tried and it has never failed to fail.


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