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What it means to “tax the rich”

Summary:
I have often advocated a progressive consumption tax. If you try to “tax the rich” without reducing their consumption, then you aren’t actually taxing the rich. Who are you taxing in that case? Perhaps you are reducing the amount that the rich put into investment projects. Or maybe you are reducing the amount that the rich donate to charity. But if you are not reducing the consumption of the rich, then it’s hard to see how you are freeing up resources that can be used to help the non-rich. In a recent post, Matt Yglesias did a nice job of explaining how public policy is ultimately not about moving money around, it’s about shifting resources from one use to another: I do see the view, from a standpoint of abstract cosmic justice, that it’s annoying to see someone

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I have often advocated a progressive consumption tax. If you try to “tax the rich” without reducing their consumption, then you aren’t actually taxing the rich. Who are you taxing in that case? Perhaps you are reducing the amount that the rich put into investment projects. Or maybe you are reducing the amount that the rich donate to charity. But if you are not reducing the consumption of the rich, then it’s hard to see how you are freeing up resources that can be used to help the non-rich.

In a recent post, Matt Yglesias did a nice job of explaining how public policy is ultimately not about moving money around, it’s about shifting resources from one use to another:

I do see the view, from a standpoint of abstract cosmic justice, that it’s annoying to see someone like Elon Musk or Jeff Bezos get so rich without contributing more to the Treasury. So there is a case for taxing wealth or unrealized capital gains or at a minimum changing the stepped-up basis rule. But fundamentally, I do think there are profound reasons why things like VAT and payroll taxes are the workhorses of European welfare states. Musk is not employing 10,000 butlers who can be taxed away and turned into preschool teachers. Inducing him to liquidate financial assets and fork over the proceeds does not generate any real resources that are available for new use. What a Nordic-style tax system does is broadly constrain consumption in order to free up resources for more extensive consumption of health, education, and other social goods.

Unfortunately, it’s politically difficult to tax the consumption of the rich because Republicans don’t like taxes at all and Democrats don’t like taxes that cost jobs in industries that make luxury goods for the rich, such as yacht building.

Yglesias’s post is entitled “The case against ‘creating jobs'”, and is well worth reading.


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Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment".

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