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OP-ED: Should the wealthy pay more taxes?

  • Published at 07:33 pm July 11th, 2020
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The coronavirus does not change standard economics

Coronavirus doesn't change quite as much as many people seem to think it does. Or, perhaps, as much as people claim it does. 

At one level this is clearly true, there always have been pandemics that cut a swathe through the human population and while the specifics differ, the simple existence of them doesn't. The level I am interested in here is that so many people are insisting that we must change this and that because Covid changes everything

I've seen the claim that we must reverse globalization as a result. The argument being that if fewer people were moving around, then disease wouldn't spread. True, yet unconvincing; the Black Death managed to reach Europe without tourism aiding it on its way. A connected claim is that we must abandon the pursuit of efficiency because Covid shows we need to have redundancy in our systems. Again, true, we do need such resilience but that's not aided by doing things more inefficiently.

The big political demand I'm seeing though is that we must tax the wealthy more. Here, as in those other cases, the coronavirus is being used as an excuse for something already desired rather than a new and vital support for the thing to be done. 

The background to the claim is that governments have spent vast sums of money on reducing the impact of the disease upon us all. That's fine as an observation of course. Further, that at some point, taxes are going to have to rise to cover this. 

This has the merit of being at least half true -- either we increase taxes to pay off the debt or we reduce the other things the government does out of the current tax burden. It's the next leap that doesn't make sense -- that therefore we should tax wealth itself. 

There's no problem with the idea that the richer among us should pay more in tax -- Adam Smith was fully signed on to that idea. The problem comes when it is wealth itself that is to be taxed. Even, in fact, the idea of taxing the income from wealth, the return to capital.

Standard economic theory includes a portion called optimal tax theory. This being closely associated with Sir James Mirrlees of Scotland who gained his share in the Nobel for it. In this, he points out that we like people investing because it's investment that makes the future richer. We also know that if we tax something, we get less of it, so we don’t want to tax people investing in making the world a better place.

So, capital and the earnings from capital should not be taxed. Of course, this means that all the plutocrats would not be taxed and that's just not going to be politically acceptable. It is economically righteous though, even if not politically just. The direct taxation of wealth itself, rather than just the income from it, suffers from further technical problems but no need to go there right now. 

Our standard economics says no to wealth taxes. Yet, there are large numbers of people who would just love to tax wealth. Various reasons are put forward for this desire -- coronavirus is only one of them. Another one that is currently fashionable is that inequality means wealth must be taxed.

Thomas Piketty has insisted that the simple increase in capital compared to the income of society means that it should be taxed. That is, many people have come up with these many justifications but they all end up hitting the same wall. The base instruction that wealth taxation is a bad idea. And none of these new attempts at justification change that base instruction either, for they don't address   the basic point.

Why do we want to tax the activity that makes the world richer for our children? 

Sure, I get it, and you do too. Some people just want to tax those rich people because they're rich. All they're doing with the coronavirus is trying out another argument to convince us, rather than providing actual new justification for the policy.    

This being true of so many of the things we are being urged to change. Those calls that the recovery must be “green” for example. No, green policies stand or fall on their own justifications, not whether or not we've just had a pandemic. So it is with so many other arguments. 

The truth being that the coronavirus might well make us think about how we provide health care -- some systems have done much better than some others -- but far fewer of the things than the current conversation is attaching it to. 

All too often, we're not being offered a novel argument in favour of the proposer's pet idea, but instead, just a new excuse for it. And that people have found a new excuse for their pet project isn't the way to be running public policy.

Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.

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