AMZN Amazon.com Inc

By Greg Ip 

Steep taxes on the ultra-wealthy are, for some, not a means to an end but an end itself. They see the very existence of extreme wealth as inimical to economic growth, middle-class prosperity and democracy. "Every billionaire is a policy failure," goes one progressive meme.

Sen. Elizabeth Warren doesn't go that far. Yet her tax plans are in the same spirit. Her wealth tax of up to 6% a year, coupled with several other levies, would serve to shrink the fortunes of many billionaires and multimillionaires. It would disincentivize the accumulation of fortunes above $1 billion much as a cigarette tax discourages smoking. (They are called "Pigovian" taxes, after the economist Arthur Pigou, who proposed using taxes to discourage undesirable behavior.)

Ms. Warren and her supporters are all for Jeff Bezos, Bill Gates and Larry Ellison creating successful companies such Amazon.com Inc., Microsoft Corp. and Oracle Corp. But they claim these men's fortunes are far larger than needed to spur innovation and business excellence and have simply become a source of entrenched privilege. A wealth tax, they argue, would repurpose the money to more socially beneficial purposes such as universal health care and eliminating student debt.

Virtually all Democrats want to raise billionaires' taxes, and it isn't hard to see why. The ultra-rich already control near-record shares of the country's wealth and income yet have had their taxes slashed, directly and indirectly, by President Trump, driving the budget deficit sharply higher.

But should they be taxed to the point that they are no longer billionaires? That's a tougher case to make. In a 2016 book, economist Caroline Freund, now global director of trade at the World Bank, found that countries with a lot of billionaires per capita had higher incomes per capita. She also found a country's share of the world's billionaires, as compiled by Forbes, corresponded closely to its share of the world's largest, most successful companies. While this doesn't mean billionaires make an economy successful, it does show the two go hand in hand.

How a billionaire earns his or her fortune matters, of course. Some are "rent seekers," meaning they skim off the productive efforts of others via corruption, royal prerogative or control of some valuable market or resource. That's why Russia is an outlier in Ms. Freund's research: lots of oligarchs, with not much economic benefit to show for it.

That, however, is rare in Western democracies, where the more important distinctions are between inherited and earned wealth. Ms. Freund says countries with less self-made and more inherited wealth do seem to grow more slowly, although the ranks of hereditary billionaires are shrinking while those of self-made billionaires are growing.

There is little economic benefit to the unlimited tax-free growth of inherited wealth. Democrats, and a few Republicans, have proposed personal, capital gains and estate tax changes to counter it.

By contrast a wealth tax, also embraced by presidential candidates Sen. Bernie Sanders (up to 8%) and billionaire Tom Steyer (1%), makes no distinction between when or how the wealth was acquired. It would hit not only Walmart Inc. founder Sam Walton's children, but also future Sam Waltons; not just Bezos today, but Bezos when he became a billionaire in 1998 and Amazon sold just books and music.

No one knows exactly how billionaires would respond, but it seems certain they would, somehow. A recent study by Enrico Moretti, an economist at University of California, Berkeley and Daniel Wilson at the Federal Reserve Bank of San Francisco notes that billionaires were once largely insulated from state-level estate taxes by a federal credit. After the credit was eliminated in 2001, the number of billionaires in states with estate taxes fell 35% relative to stateswithout. Whether the wealth was inherited or self-made didn't seem to matter. In another study, the authors found that star scientists -- the kind that power technology or biotech companies -- tend to leave states with relatively higher personal or corporate income taxes.

Gabriel Zucman, an economist at the University of California, Berkeley said unlike a state tax, American billionaires couldn't avoid Ms. Warren's wealth tax, which he helped design, by moving, even abroad. And he said the tax wouldn't deter entrepreneurs from taking risks and building companies, because they are not mainly motivated by money and taxes. Mr. Gates founded Microsoft, he noted, when corporate, personal and estate taxes were far higher than today. Nor would a 6% wealth tax matter much to someone like Facebook Inc. founder Mark Zuckerberg, whose wealth has grown 40% a year since 2008, he added. A wealth tax, he said, would mean the Forbes 400 would have more self-made billionaires like Mr. Zuckerberg and fewer hereditary billionaires.

But Mr. Zuckerberg is exceptional. For many billionaires, Ms. Warren's taxes could easily eat up most if not all his or her returns. Founders would have to steadily sell off their holdings to pay their taxes, shrinking their stake. "To say you can't have that wealth means you can't own your company," Ms. Freund said.

That's a problem, she said: The founder is often a more successful and committed chief executive than an outsider. "They really, really care and need to have controlling interest to make decisions," she said. Indeed, many billionaires use the wealth from one venture to start another: After selling Electronic Data Systems to General Motors, Ross Perot later used the proceeds to start Perot Systems. Mr. Bezos is selling Amazon shares to finance Blue Origin, his space company.

This isn't a reason not to tax billionaires; it's a reason to be careful about how it's done.

Write to Greg Ip at greg.ip@wsj.com

(END) Dow Jones Newswires

November 20, 2019 11:40 ET (16:40 GMT)

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