According to many devotees of Bernie Sanders and Elizabeth Warren, their ideological counterparts in left-wing circles in Canada, and even 62 percent of the audience at a recent TVO debate hosted at the University of Toronto, confiscatory taxes should be levied against the wealthiest members of society until billionaires are taxed out of existence.
The thinking – or lack of it – behind this idea is that massive wealth redistribution is necessary because the rich have accumulated their wealth on the backs of the middle-class and the poor. Moreover, according to those who imagine themselves fit to determine the allocation of the national wealth, since billionaires have more money than they need or deserve, it is only fair to take it away.
The idea, however, that the riches of some are responsible for the poverty of others, at least in the context of a capitalist economy, is nonsense.
In his 2014 book on the psychology of anti-capitalism, columnist Peter Foster provided a tremendous response to the anti-billionaire crowd. “Would the world be a better place,” asked Foster, “if Bill Gates – and all the other billionaire entrepreneurs – had never been born? In fact, what the wealthy in a capitalist society are ‘guilty’ of is not taking too much,” wrote Foster, “but creating too much.”
If we want to accuse Bill Gates of taking more than his fair share of wealth, Foster contended, we might also want to then accuse the greatest musicians, like Ludwig van Beethoven, or The Beatles to take a more recent example, of taking more than their fair share of musical fame. But like today’s billionaires, Beethoven and The Beatles were surely not guilty of taking too much, but rather they created very much.
Importantly, just as the vast majority of the social benefits of the music created by Beethoven and The Beatles were enjoyed by society at large rather than the musicians themselves, so too are the vast majority of the economic benefits associated with the creation of Bill Gates’ fortune (and that of other billionaires) enjoyed by ordinary members of society rather than the billionaires themselves.
A study in 2004 by William Nordhaus (who won the Nobel Prize in economics in 2018 for his work on climate change economics), estimated, based on technological advances over a period of more than 50 years in the American non-farm business economy, that only about 2.2 percent of the total benefits of innovations were enjoyed by the innovators themselves. The vast majority of the benefits, Nordhaus reported, were enjoyed by the consumers.
Just as we would not think of levying punitive taxes against the most popular musicians, since this would discourage them from creating more music, we should not be in favour of levying confiscatory taxes against billionaires, since this would discourage them from creating more wealth.
Indeed, if some members of society, by earning billions of dollars, have demonstrated a remarkable ability to produce economic benefits – almost all of which, as Nordhaus’ research suggested, is enjoyed by the general public – then surely the way to enrich society is to encourage the billionaires to produce even more.
Imposing confiscatory taxes on the most economically successful members of society is not only an unfortunate display of ingratitude for the economic benefits they’ve created for the rest of us, but it’s also greatly counterproductive.
Matthew Lau is a research associate with the Frontier Centre for Public Policy.