FARGO — The rise of economic populism has sparked civil unrest around the world. Concern over inequality has led to unrest in Chile and has propelled candidates like Sens. Elizabeth Warren, D-Mass., and Bernie Sanders, I-Vt., into the forefront of the Democratic primaries. But the commonly offered solution to economic and social disparities — the idea of taxing a nation into prosperity via eating the rich — isn’t new and will likely fail.
The primary issue with the eat-the-rich approach to public policy is that of capital flight. People are generally invested in keeping as much of their money as possible. When we file our federal taxes, we seek to maximize our deductions and lower our individual tax burdens. This behavior is logical and prevalent across all income brackets. Higher taxes only increase the incentive to practice legal tax avoidance.
Additionally, capital flight can’t easily be avoided in a dynamic global economy. The wealthy aren’t going to sit around and wait to be robbed by the state. They and their army of money managers monitor elections and legislation for political risk. At the first sign of trouble, before any law can take effect, the bulk of their wealth will be moved to tax shelters. Understandingly, a panel of economic experts from America’s most prestigious universities overwhelmingly agreed that a Warren-style wealth tax would be difficult to enforce.
However, theory is for philosophers, and we all live in the real world. Europe is often hailed as the mecca of varying forms of socialism but even they couldn’t make the wealth tax work. French researcher Eric Pichet found that from 1988 to 2007 the country’s wealth tax reduced GDP by 0.2% annually (which is by no means trivial) and cost the country the equivalent of more than $3.8 billion annually after adjusting for capital flight. Similarly, the United Kingdom, Germany, Sweden, Finland, Norway and Iceland have all either eliminated or substantially reduced the scope of their wealth taxes. In Europe, socialism has little to do with eating the rich. When adjusting for population, Nordic countries have more billionaires than the United States, but a substantially lower level of average after-tax disposable household income.
This is by no means a comprehensive criticism of the multitude of unintended consequences of taxing wealth. Taxing wealth is believed to have a negative effect on investment spending, retirement planning, and individual property rights. A tax of any kind is effectively a fine on economic activity. The ultimate paradox is that taxes on wealth won’t stop at just discouraging wealth accumulation, it will also discourage wealth creation, inevitably leading to less wealth to redistribute in the long run. If the past is any indicator of the future, grandiose plans for a massive welfare state will either end in chaos, ransack the middle class or both.