The White House explicitly discredits highly successful entrepreneurs, with the recently proposed wealth taxes as the latest example of the war on our country’s roughly 700 billionaires. President Biden and Senator Sanders echo each other often in arguing the rich are not paying their fair share in taxes. While the very rich are portrayed as selfish and not contributing to our society in terms of helping others, the argument is divorced from economic logic and assumes that sending taxes to Washington is the only way to help your fellow man.
Billionaires have in fact helped more people than anyone else, particularly the poor, through their market activities that pays about 95 percent of the fruits of their labor to others, but also directly through charitable donations that are more efficient contributions to the safety net than taxes.
Lawmakers fail to understand that the way a market economy works is that one gets rich by helping others, by selling them things that they value more than the price they pay. If you would be willing to pay $10,000 for life with a cell phone but bought the phone for $500, the difference of $9,500 is what economists’ call “consumer surplus” representing the benefit you get from the purchase, by definition free of charge. Our richest citizens help consumers the most in this way and in the process take part of what was not given to consumers, sales, to help the largest number of workers get jobs–the best welfare program known to man.
In the US, companies only capture less than 5 percent of the value their products and services generate to society. The rest is consumer surplus free of charge, and similar in magnitudes to the cell phone example above. Thus, more than 95 percent of the fruits of their labor goes to others, beyond what any fair share would call for. Just think of COVID vaccines that have sales in the billions but brought back trillions in economic activity. The rich are getting richer for great reasons as they now help more people around the world through globalization, as opposed to only people closer in proximity in the past.
If “paying a fair share” means contributing an increasing share of one’s value to others, capitalism itself is more progressive than income tax-schedules devised by politicians, and Forbes’ 400 richest Americans contain many people who has transferred a larger share of their value to others than conventional tax shares discussed.
Life-long politicians in DC, divorced from market logic, argue the rich are not helping others enough because the only help that matter is to help politicians by sending them more in taxes. But revenues are also used for redistribution to get votes from interest groups so beware of self-interested arguments under a conflict of interest. Ignoring that 40 percent of revenues are paid by the top 1 percent, such arguments instead focus on income shares (contradicted by the fact that the rich pay tax beyond their share of national income too).
The politicians’ rhetoric urges billionaires to help the public sector, rather than private sector, to improve the safety net. But taxes don’t provide a safety net as efficiently as the private donations of the rich do. Taxes introduce middlemen; politicians who use taxes for many other purposes than helping the poor. Donations to private charities are far more focused on the poor than government transfers are.
In 2020, about 88 percent of total giving in the US of $470 billion was by individuals and their foundations, largely focused on church, educational, and general welfare activities for those most in need. Only about 17 percent of U.S. federal spending in 2019 was on poverty programs, small compared to the percentage of donated income spent on the poor. An extra $1 billion in taxes would generate $170 million on the poor but more help for them would occur if the billion was untaxed with 17 percent of it donated.
Indeed, public charitable spending on the poor may be less have productive than commonly argued. Public safety net spending crowds out private donations so that a cut in the public safety net would be replaced 75 percent by an increase in private giving. But the missing 25 percent equals economists’ estimates of the cost of collecting taxes on top of revenues, due to distorting economic behavior to avoid taxes. Forced taxation may have few advantages over private giving, more in tune with what’s needed in a local community.
Because of these factors, new billionaire taxes are often an inefficient way to help the poor compared to donations. Put differently, the Giving Pledge of Warren Buffett and Bill Gates currently has 227 billionaires who have committed to give away a majority of their wealth. This far more effectively helps the poor than a billionaire wealth tax above 50 percent.
Capitalist billionaires pay the largest share of their value to others by helping them, especially the poor, both indirectly but also directly through donations. In contrast, socialist billionaires get their wealth from hurting people. If tax reformers understood markets, they would not stay in the way of the superrich who are contributing more than their fair share as evidenced by their wealth.
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