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How rich is too rich?

Published 11:00pm Wednesday, November 20, 2013

Last week I discussed the origins of the fortunes of the Forbes magazine’s list of the 400 Richest Americans. While we might expect that heirs to the fortunes amassed by Rockefeller, Vanderbilt, Morgan, and Ford would dominate the list, the vast majority of the Forbes 400 made their fortunes through businesses shaping the American economy today.

Making the 2013 list required a net worth of $1.3 billion, and Bill Gates was again the richest American, worth an estimated $72 billion. Most of us cannot comprehend such amounts of money. Many people find such accumulations of wealth offensive, and argue for government redistribution. Taxing the rich is a familiar refrain, and several states have even instituted millionaires’ taxes.

Some observers further argue that the dangerous level of our national debt strengthens the case for taxing the rich. They argue that America’s greatness has allowed the accumulation of such fortunes, so the rich should give back to the country. The second richest American, Warren Buffet, says he is willing to pay more in taxes to help. Surely Mr. Gates, Mr. Buffet, and America’s other super rich could surely bail out Washington. Only they aren’t that rich.

Many numbers illustrate how taxing won’t save us from the fiscal cliff. For instance, according to IRS data, the top 1% of households pay 37% of Federal income taxes, yet earn only 19% of national income. Incidentally, the U.S. taxes top earners more heavily, according to this measure, than other wealthy nations.

The wealth of the Forbes 400 also illuminates the limits of taxing the rich. The Federal government spent $3.8 trillion in the 2013 fiscal year, or more than $10 billion each day. The 2013 Forbes 400 were worth in total $2 trillion. Even if we taxed away all of this wealth, it would fund the Federal government for about 200 days. The lifetimes’ work of these individuals would fund Washington for less than a year. Bill Gates’ fortune would last about a week.

Taxing the incomes of the Forbes 400 would yield far less revenue, because a person’s earnings in any one year are just a fraction of total wealth. Thus a very high tax rate for America’s super rich would hardly make a dent in our budget mess. Washington’s budget woes result from its culture of spending, not inadequate taxes. Taxing the rich does about as much for the Federal government’s spending problem as throwing gasoline on a fire.

Of course taxing away the wealth of the rich would be an economic disaster. A dynamic, growing economy must allow those who create value to prosper. Property rights support the free enterprise system, and yet vanish if the government can tax away all of a person’s wealth. The incentive to start businesses would largely disappear. Tax revenue in the future would plummet as wealth creation grinds to a halt.

Let’s turn to the other part of the tax the rich argument. Is the accumulation of wealth a bad thing? The Forbes 400 overwhelmingly earned their money from voluntary transactions in the market place. Businesses like Microsoft, Wal-Mart, Best Buy, and Home Depot only build fortunes for their founders by providing products that customers want to buy. Americas’ self-made billionaires have improved the economy, and consequently our lives, by offering better or less expensive goods and services that people are willing to spend their money on.

Does wealth beyond some level become obscene? Obscenity is a matter of perception, but wealth creation in the market always signals economic progress. Let’s approach this question differently. Would we be better off if the Forbes 400 had retired after becoming financially set for life? Consider one example, Hollywood director and producer, Steven Spielberg. Would we be better off if he had retired after making Jaws, Close Encounters of the Third Kind and E.T.? If so, we would not have had Indiana Jones, Jurassic Park, Schnindler’s List or Lincoln, just to name a few. Mr. Spielberg only adds to his fortune and fame by making good movies. When the Forbes 400 continue to produce wealth, we all benefit.

 

 

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University. Respond to him at dsutter@troy.edu and like the Johnson Center on Facebook.

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