What happens if you tax the "rich"? Let us start answering these questions first, then get to the larger picture and the issue of "luck."
The tax code evaluates people's income whether from employment or investments. If these are above a certain amount, the code and the new laws classify them as "rich" and subject them to higher taxes.
Imagine workaholics, entrepreneurs, pouring back their incomes into businesses, or start-ups, only to invest the rest in other assets. What happens if governments tax away a large fraction of his income? This person will save and invest less, and bureaucrats will redistribute the money based on political winds of the moment. Yet entrepreneurs have experience on how to match capital and hold people accountable, whereas bureaucrats do not.
It is not the case that financiers and entrepreneurs don’t make mistakes, and at times grave ones. However, they are forced to correct them faster than bureaucracies - as they have no access either to taxes, or borrowing that is an effect of the latter. Their credit dries out. By contrast, governments have access to the tax revenues of an entire country, and an ability to borrow against them as collateral.
Thus, bureaucrats at all levels (federal, state, and municipal), with access to enormous credit, correct their mistakes at leisure, frequently allowing them to compound. And compound they do until governments' ability to tax and borrow hits a wall and they default, or come to the edge of default.
What if instead of taxing savings and investments of the rich, government taxed their - "consumption" - when they acquire it, that is, when they spend on whatever may be labeled "conspicuous consumption" rather than tax their ability to finance new companies, expansions of existing one, R&D?
At first reading, this argument would suggest that a significant part of the tax burden should take the shape and form of a sales tax, and that such tax could be a remedy for the present significant discontent in the U.S., and elsewhere too. Yet that is not the practical implication of the above arguments, because I left out two major issues.
One is the implication of what I mentioned before: that societies become complacent and mistakes compound as more and more of taxpayers' money passes through bureaucracies hands, due to both higher taxes and ever more complex regulations, regulations merely a theoretically less visible form of taxation. Consider the issue of the new slogan of "affordability." It is a consequence of societies having bought into the myth of "education" - spending trillions directly and indirectly to keep young people in so-called "education institutions" into their twenties.
Yet, they wind up with certificates backed by nothing, except frequently, frustrated expectations. Compound this mistake with rent controls, that has prevented both maintaining buildings in decent shape, and building new ones in cities - and the two mistakes shed light of what's hiding behind the new political slogan.
Here are the numbers: 49% of adults aged 18 to 29 now live with a parent. This is up from 43% in 2022 and 37% in 2019. Roughly 70% of young adults living at home are employed, which suggests that the trend is driven by both relatively low incomes, high student debts, and high housing and rental costs.
No sales or consumption tax is a solution to this problem. When sales taxes are high, people can avoid paying them by transacting under the table. Greece’s black market is estimated to be 20.9% of GDP, whereas in Italy it is estimated to be 12.6%. Tax evasion was the reason that that few years ago France recognized that it was better to tax home repairs at 5.5%, rather than 18% it roughly levies on consumption items.
Briefly, a consumption tax or any single tax is no solution for solving the problem of compounding mistakes that have accumulated for decades. The solution is to directly attack the problems that brought about the mismatching of talents and capital in "education," and in "real estate" - to start with.
The second element I omitted is "luck," rarely related to debates on taxation. Yet it should be a crucial part of any debate on taxes, taxing investments and savings in particular.
Luck's incarnations are many. There are genetic accidents of good looks, eye-hand-feet coordination, or a memorable voice. Fortunes can be built on them, often with relatively little effort and at very young age. Taxing some of the rents received on these "natural resources" due to genetic accidents would not prevent these lucky people to do the catwalks, their best in sports, movies, or on screens.
After all, their the second-best alternatives are so distant that perhaps it is not so surprising that Hollywood and very successful artists are often prominently in favor of higher taxes on incomes of the "rich." Extrapolating from their own experience, they justly believe that even if paid $10 million for a movie or a painting, rather than $20 million, their performance would not change - with being, say, a "personal trainer" perhaps as their alternative ways of making a living.
Luck works in other ways too. Charles Goodyear accidentally spilled some rubber with sulfur on a work stove and stumbled on "vulcanization." Percy Spence at Raytheon, the military contractor, walked by a magnetron and saw the chocolate bar melt in his pocket - and the microwave oven was thus born. And when communism suddenly went up in smoke, the "peace dividends" came in variety of unanticipated ways and forms. Did Zuckerberg or Bryn and Page - anticipate Facebook's and Google's success? They all tried to solve some problems when they stumbled accidentally on what made these companies the defining ones of the last few decades.
If so, this suggests - superficially - that if you tax away part of the effect of luck, no investment pattern would change. However, identifying that level of taxes on incomes and capital that would achieve such an ideal situation is an art, not science. If "too much" were taxed away, there would not be enough money left to bring to life the "vulcanization," "microwaves," "drastically lowering the spread of information (true, misinformation too)" etc. kind of innovations. True, governments would get more money for a bit. But what are the chances that government bureaucrats would allocate money to bring these ideas to life? Nil.
Briefly: if you want to sustain a society where "luck meets the prepared mind," better to err on the side of having enough savings and capital in the hands of those "trying or financing" their luck, pursuing options, rather than tax that away. By doing the latter you bring about a gradual decline into a "luckless" society.
What, then, is the solution concerning taxes for a society that wants to stumble into the best possible future?
Jean-Baptiste Colbert, Louis IV's finance minister, said "The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing." This statement if often quoted but is incomplete: Pay too much attention to the hissing of the increased number of people who get benefits from the government, but hardly pay taxes, and you will get a "luckless" society. The key for prosperous future is then to find a level of taxes without lapsing into "lucklessness." Otherwise, societies fall gradually into oblivion that the Founding Fathers feared.
