You Cannot Just Tax Billionaires & Give It To The Poor

Modern Day Robin Hoods Have It Wrong

In our world of insane inequality, there is an ever present focus on redistribution. This appears to have ramped up a gear in recent years. Centrist political parties have struggled to combat the legacy of the 2008/09 financial crisis, triggering a decade of sub-standard productivity and real wage growth.

There is nothing that gets people angry like not being able to persistently expand living standards as real wages rise, especially as asset price inflation since the early 2010s has picked up to extreme levels. Social media also has a role to play, thrusting the lives of the extreme wealthy in everyone’s faces. The wealthy are wealthier and we can all see it.

Thus comes populism, on the right generally focussed around extreme free market libertarianism (and other common focusses like reducing immigration) and on the left around redistribution, in the most extreme, large scale wealth taxes.

In this vein, the low tax rates that billionaires pay is a constant focus of the news and political cycle. In the UK, the last week has seen Labour leadership hopeful Wes Streeting called for “A Wealth Tax That Works” (weirdly he was actually advocating for a capital gains tax, not a wealth tax), while Green Party Leader Zack Polanski has long called for wealth taxes. These policies are the preserve of the hard left through most developed markets. In the last week too, Jeff Bezos got a lot of flack for what was quite an insensitive interview he did with CNBC, where he claimed “You could double the taxes I pay, and it’s not going to help that teacher in Queens, I promise you.”

This is no doubt an idiotic thing to say, and will rile up the majority of the viewers there. It is also half wrong; if Jeff Bezos was taxed more it may go some way to help that teacher in question.

However, it is only half wrong, which makes it half right, but not for the reasons Bezos thinks. Also, it isn’t half right in any sort of way that makes it fair that billionaires exist and can create wealth that can last for more generations than we would imagine. It is not a justification for the major wealth inequality that persists globally.

It is only right in the sense that we cannot muddle up the financial and real economy in a way that those advocating major wealth taxes would do.

To illustrate the problem here, we must think about what the financial economy does, and that is it operates as our way to handle the intertemporality of the real economy. The financial economy allows us to work now and consume later (savings), or consume now and work later (debt). Essentially, all of finance is set up to facilitate this intertemporality, including the way that central banks manage interest rates.

The problem with large scale redistribution of wealth from billionaires to the poor is that billionaire’s wealth largely remains in financial assets, and does not impact their consumption, i.e. it mostly just resides in the financial economy. In economic parlance, these billionaires have a low marginal propensity of consumption (MPC) and the money that is in their possession has low velocity (it is not frequently exchanged for goods and services). In contrast, poor people tend to spend much more of their income, having a high MPC, and the money will flow faster, having a higher velocity.

Should you impose large scale wealth taxes, and transfer wealth from billionaires to the poor via the government, this could be fiscal neutral. For instance, you could raise tax revenue worth 1% of GDP via wealth taxes and pay increased social benefits worth 1% of GDP. A macro model might tell you that this is largely neutral on the output gap, inflation, and activity.

However, what you have done is shifted money from someone with a low MPC to a high MPC. Equivalently, you have increased the aggregate velocity of money. We know from economic theory that

MV = PY

For money supply M, velocity V, price level P, and real output Y.

Increasing V with M held constant in our case must increase PY, and the question then turns to what extent the adjustment is in prices (P) or quantities (Y).

If inflation is low, credit creation lacklustre, and fiscal policy struggling to support output, then these inflationary pressures could be easily absorbed, i.e. in a slack economy, some of this demand pressure may instead raise Y rather than P (the adjustment is on quantity not cost).

However, if inflation is above target as it is now, and major DM economies still running too hot, such large scale transfers would be inappropriate due to the inflationary pressure they generate, even if they are fiscal neutral. In this case, the central bank would need to move to alleviate these price pressures in tightening policy (lowering money supply growth), hitting regular households and businesses.

So it’s not so easy. You cannot (always) tax the ultra-rich and give it to the poor).

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This newsletter is for informational purposes only. It does not constitute investment advice or an offer to invest. The views expressed herein are the opinions of JB Macro exclusively. Readers should conduct their own research and consult with professional advisors before making any investment decisions.