What it means to “tax the rich”

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.



39 Responses to “What it means to “tax the rich””

  1. Gravatar of Dzhaughn Dzhaughn
    18. December 2021 at 18:29

    But but but while AOC’s dress said “tax the rich” the real progressive line is better said as “defund the rich.”

    If you want to control the economy you cannot afford to have these pesky rich people lending money to other people just because they want to build a business. Would that Musk did have 10000 butlers, as long as those butlers are unionized.

  2. Gravatar of Brandon Berg Brandon Berg
    18. December 2021 at 21:51

    For people with sufficiently low marginal propensity to consume, even taxing consumption doesn’t reduce personal consumption. Short of confiscating 99.99% of his wealth, there’s no tax policy that will reduce Warren Buffett’s personal consumption, for example. Levy a 900% tax on consumption, and he’ll just sell ten times as much stock. Warren Buffett cannot be taxed by any sane tax policy.

    My sense is that Democratic opposition to taxing consumption has less to do with employment of yachtbuilders than with the knee-jerk indignation, as mentioned by Yglesias, at the idea of people accumulating great financial wealth without paying taxes in proportion to this. Yes, they’ll eventually either pay taxes when they cash out, or donate it to charity, but the left wants them to pay taxes in proportion to their wealth right now.

  3. Gravatar of Mark Z Mark Z
    18. December 2021 at 22:16

    If whenever Warren Buffett spends $10 on food, you make him buy $2 worth of food for someone else, are you not reallocating consumption? The fact that his consumption is such a small fraction of his net worth and thus it will take a long time to consume all of it is only a ‘problem’ if one believes the federal government could manage his portfolio better than he (and his descendants) can.

    As a matter of ‘justice’ I guess the key point is, why does anyone care about how much of their paper wealth is being taxed right now? The idea that someone would think this thought – “I know Buffett or whoever gets to spend his wealth will pay a 99.999% consumption tax and thus will only get to enjoy $1 million dollars worth of his $100 billion, but just the fact that it says $100 billion right now on his account makes me indignant” – strikes me as ridiculous. Who cares what it says on his account info?

  4. Gravatar of gt gt
    18. December 2021 at 23:05

    Ownership of stock, for someone like Elon Musk, provides two benefits: the financial resources for consumption and the control of the company that the stock represents. Part of “taxing the rich” is taking that control out of the hands of Musk, and consumption taxes don’t solve that. (I think that the world would be better off if everything was the same except that all of Musk’s shares of Tesla were immediately sold on the public market.)

    I do think that a consumption tax would be *better* than most of how the current system works though. I think most leftists would agree, it’s just unfortunately hard to sell politically.

  5. Gravatar of Asher Asher
    18. December 2021 at 23:58

    The progressive consumption tax, like most good ideas in economics, was championed decades ago (1940) by Keynes in “How to Pay for the War”.

  6. Gravatar of Matthias Matthias
    19. December 2021 at 01:18

    Gt, Tesla’s other shareholders seem to be doing well with Musk. What problem are you trying to solve here?

    I can see that theoretically investing in some projects or companies on more-generous-than-market terms I’m return for influence or similar is essentially consumption in disguise.

    It’s just that it doesn’t show up as cash flow, just as opportunity cost.

    For the special case of land, a land value tax addresses this problem nicely.

  7. Gravatar of Jens Jens
    19. December 2021 at 01:29

    I think the best way to “tax the rich” is to find ways to contain their power. There will be different ways to do that, and of course you have to look at what instruments and institutions they use to exercise that power. It’s not so much about redirecting the resource consumption of the rich. It’s about containing their use of resources.

  8. Gravatar of Lizard Man Lizard Man
    19. December 2021 at 03:55

    I thought that more efficient economies have more jobs than less efficient ones, and that the lack of jobs in the formal economy was a big problem for developing nations.

  9. Gravatar of ssumner ssumner
    19. December 2021 at 08:24

    gt, If you aren’t taxing consumption you are taxing investment. So you move funds from investment and charity to government consumption or welfare payments.

  10. Gravatar of ssumner ssumner
    19. December 2021 at 08:26

    gt, If you aren’t taxing consumption then you are taxing investment or charity. So you move funds from investment and charity to government consumption or welfare payments.

    Maybe that’s good, but it’s not taxing the rich.

    Lizard, Yes, but how does that relate to this post?

  11. Gravatar of Lizard Man Lizard Man
    19. December 2021 at 11:54

    Even at full employment, growing number of jobs is still likely to be indicative of growing efficiency as people move from the informal economy into the formal economy. So creating jobs is still arguably worthwhile. And inflation puts a lot of pressure on inefficient businesses to shape up or go bust. And I would think that inflation is a tax on the wealthy and their consumption, as inflation driven by full employment encourages automation and other mass market efficiency innovations, and I would think would raise the relative cost of bespoke goods as wages rise for jobs serving the mass market.

  12. Gravatar of vince vince
    19. December 2021 at 12:44

    Wouldn’t a land value tax, Georgism, be even better? Many economists say so.


  13. Gravatar of ssumner ssumner
    19. December 2021 at 15:24

    Lizard, If you are at full employment, you cannot create more jobs without triggering destabilizing inflation.

    Vince, Maybe, but it doesn’t provide enough revenue for our current government.

  14. Gravatar of rinat rinat
    19. December 2021 at 15:33

    Your policies will destroy American small business, and lead to more centralization & eventually totalitarianism.

    First of all, Yglesias writes for the most left wing papers in America. Your proclivity to quote him in each of your written posts, says a great deal about your political preferences (i.e, hard left & totalitarian).

    Secondly, conservatives & Libertarians do support taxes. Your argument is mendacious, and such garrulous triviality is best left for political quacks attacking strawmen. It’s unbecoming of an academic. Limited government is not anarchy.

    Finally, It’s obvious you have never owned a business. Between federal, state, and local, NYC businesses currently pay greater than 50% of their earnings.

    Why does a sandwich shop in NYC have to pay for a low iq civil servant to stay at a five store hotel? Why does a sandwhich shop have to pay for foriegn aid that goes into the pockets of politicians, or send money to supranationals that abritrarily shut down his business with a stroke of a pen?

    The examples of waste, fraud and abuse, are truly endless.

    Instead of taxing more, why don’t you spend less. Or at the very least, spend locally. The sandwich shop owner might not complain about 50% in taxes if those taxes were actually spent improving NYC, and were not placed into the corrupt hands of busybodies in Washington.

    And btw, you are not going raise taxes on MNC’s by raising taxes in America. They can still access the double irish and dutch sandwich. They can still setup shelf companies offshore. You are walking advertisement for those companies. They love your policies because it helps them to consolidate industry and destroy their competition.

    There is nothing MNC’s fear more than limited government.

  15. Gravatar of Harry Harry
    19. December 2021 at 15:55

    Last year, I hired Ernst & Young to go through my books.

    Despite some creative deducting, I still had to pay 39%. I took on all the risk, and between state and local government took 40% from me.

    I’m now looking for investments in Southeast Asia and Eastern Europe. I don’t even bother looking for investments in America anymore. The returns are too low.

  16. Gravatar of vince vince
    19. December 2021 at 16:14

    On the land value tax, total land value has been estimated by bea.gov at 23 trillion in 2009. At that time, tax revenues were 2.1 trillion. A land tax of 9 percent would have done the job.

  17. Gravatar of vince vince
    19. December 2021 at 16:24

    rinat, how would a consumption tax, replacing our current system, destroy small business? a consumption tax is a better tax. one problem, of course, is it’s regressive. I’m sure that’s why ssumner mentioned a progressive rate structure. Another way to make a consumption tax progressive is to augment it with a very low rate tax on very high AGIs, and use that as a prebate for low income taxpayers.

  18. Gravatar of Janice Janice
    19. December 2021 at 16:48

    Little Summy Sumner is just jealous he doesn’t have a yacht.

    Why don’t you go loot a store Sumner, like your other left wing thugs.

    Elon creates jobs. You don’t. You have no good ideas, no business, and no money to invest. Elon’s entire wealth is predicated upon his companies success or failure. He doesn’t have 300M in cash. It’s all equity. And an increase in his wealth also increases the wealth of all investors who contribute to his business.

    He pays high salaries to workers who have no responsibility other than to work 9-5 on one specific task. These workers take zero risk. After 5:00, they can go home and think nothing of their business. Zero pressure and zero risk on their shoulders. If the company does poorly, they still get paid every month. There kids still get food because of Elon’s money.

    You have no money because you have never taken risk. Your entire life has been spent behind a desk, and the only thing you have to show for it is two lousy books. So get off Elon’s back, and stop legislating theft you selfish prick.

  19. Gravatar of ssumner ssumner
    19. December 2021 at 19:59

    Vince, Just to be clear, I think a land tax makes sense. But a 9% land tax is not politically feasible. You’ll need other sources of revenue.

    Imagine an 80-year old lady in California who is retired. She lives in a $200,000 house on land worth $500,000. Try getting her to pay $45,000 in land tax out of her Social Security check.

    Right now she’d pay $7000 in property tax.

  20. Gravatar of dtoh dtoh
    19. December 2021 at 21:22

    I’ve said this before.

    Federal Sales of 20%. Purchases for business exempt. Every citizen/resident gets an annual $5k deductible. Farm out the operation to Visa.

    Eliminate all other federal taxes. (Except a 300% tax on business lunches to keep Scott happy.)

    States generate revenue from a tax o fixed assets with a value over $75k (land, buildings, cars, jets, paintings) that are NOT being used ENTIRELY for business purposes.

  21. Gravatar of vince vince
    19. December 2021 at 21:34

    dtoh, the math doesn’t work. oecd says in 2020 US tax to gdp was 25.5 percent. and that includes business purchases.

    ssumner, details sure need working out on the land value tax, but that 80 year old with 500k in land maybe should have downsized years ago.

  22. Gravatar of Dtoh Dtoh
    20. December 2021 at 03:11

    I haven’t run the numbers in a while but you need to back out social security contributions and then the numbers work. Land tax makes sense but it should be on all fixed assets used for personal consumption.

  23. Gravatar of observer observer
    20. December 2021 at 09:35

    Why do you want to tax Musk?

    Musk hasn’t “taken” anything from anyone. What he – and other founders, from Rockefeller onward – have done is create a massive amount of wealth with both innovation and incredible business discipline, then retain some proportion of that new wealth. Society gets the rest of it, through better products, lower cost products and an increased ability to generate their own wealth.

    Rockefeller was successful *mostly* because of his exemplary business discipline, which he baked into his entire organization. That business discipline was bequeathed to all the oil companies Standard Oil begot, and it continues to this day throughout the American oil industry. It has generated untold wealth for people world-wide, as other companies were forced to compete at the same level. The wealth generated by Rockefeller for the US and the world is **well worth** the cost of the fortune he earned. The same will be true of Musk.

    Whatever the case, people who want to take wealth away from rich people are making a big political mistake. Most people don’t care that some people have great wealth – particularly a guy like Musk, who clearly busted his buns to earn it. What they care about is opportunity for themselves.

  24. Gravatar of ssumner ssumner
    20. December 2021 at 10:34

    dtoh, I agree that a property tax should include residential housing. And we should stop taxing billionaire condos in Manhattan at a lower rate than working class houses in Queens.

    Vince, You said:

    “ssumner, details sure need working out on the land value tax, but that 80 year old with 500k in land maybe should have downsized years ago.”

    In California that might be a tiny old ranch house from the 1950s, on a small lot. Again, I’m not saying a land tax is a bad idea—it’s a good idea, but the politics are very difficult.

    Observer, You asked:

    “Why do you want to tax Musk?”

    What a weird question, directed at someone who wants to abolish all taxes on investment income. Do you really think that Musk would be opposed to my tax plan? He’d benefit greatly.

  25. Gravatar of vince vince
    20. December 2021 at 11:08

    ssumner: In California that might be a tiny old ranch house from the 1950s, on a small lot.

    That’s the power of the land tax If a $200k small ranch sits on land worth $500k, the land is probably not being used for its most efficient economic purpose; the tax regime pushes land use towards efficiency.

    Really, I consider a land tax just another one of those good ideas that, for political or whatever other reasons, will probably never be adopted.

  26. Gravatar of Henry Henry
    20. December 2021 at 12:30

    Sumner’s pharma-fascists are continuing their descent towards totalitarianism.

    An old and wrinkly octogenerian, with an incredibly low IQ, now wants to tell you who can visit your house for Christmas.


    German Health Minister wants to “force people” to take the vaccine. Its a shame that Germans don’t have guns! The conspicuous do-gooders thought banning weapons would virtue signal their moral superiority over barbaric nations. The German people were “above” that petty need to defend oneself.

    Now the socialist sympathizers wish they had them.


  27. Gravatar of ankh ankh
    20. December 2021 at 14:19

    There is something a bit horrifying about abating consumption, and using that as your primary motive.

    The tax income derived from the U.S. government is greater today than ever before.

    A hundred years ago you operated with far less, and your country was much wealthier. A 1940’s family had greater purchasing power than a family today. Of course, back then America still manafuctured things. Today, you send those factories to my country.

    We’ve doubled our salaries in the last decade, so thank you for those jobs.

    But how about Americans? Have their salaries doubled?


    not good!

  28. Gravatar of Sarah Sarah
    21. December 2021 at 14:32

    Scott reminds me a bit of Lawrence O’Donnell, known for his daily hate-filled rants and obtuseness. I have no idea why my professor would recommend this blog.

    Ranting and raving is not my cup of tea. It’s very unflattering, unmanly, and adolescent.

    But that seems to be a common characteristic in academia. Most of my professors are childish. A few are respectable, but the vast majority are hyper partisan, and super creepy. I cannot tell you how many times I’ve caught them staring at my body during exam sessions or at office hours, or how many times I wished they would simply teach material in the book instead of listening to hate filled diatribes.

    It also extends beyond the classroom; indeed it may now be a significant part of who Americans are. Take for example, CNN. Two employees have been charged with pedophilia in the last two weeks alone.

    But above all, progressives lack authenticity. A man can be a woman, a Nigerian can be a white french, a french can now identify as a white Nigerian, nations don’t need borders, an economist can apparently be a medical expert, illegal drugs are good for you, vaccines can be coerced or forced into your body, freedom of speech is hate speech, rich people are invariably evil, pedophilia is simply a beautiful expression of lust as opposed to a horrendous crime, totalitarianism is not that bad – just try it, stealing from others is okay because they deserve it, etc, etc.

    To the progressive, nothing is sacred. They manufacture a world that is so horribly homogeneous and cruel.

    If being progressive means I have to subscribe to the above, then I’m definitely a conservative. And I’m proud to be one.

  29. Gravatar of ssumner ssumner
    21. December 2021 at 14:52

    vince, The market already pushes in that direction; it’s stupid government zoning regulations that prevent redevelopment.

    Sarah, Well stated, but are you sure you aren’t confusing me with someone else? This post is on tax policy, not pedophilia.

  30. Gravatar of vince vince
    21. December 2021 at 15:58

    Not to keep beating a dead horse, but if zoning regulation limit use, then the land value should be reduced.

  31. Gravatar of Matthias Matthias
    21. December 2021 at 21:27

    On the land tax: you can’t just take the current market price of the land and multiply by the proposed tax rate to get an estimate for revenue.

    The tax itself will have a big impact on the land prices.

  32. Gravatar of Matthias Matthias
    21. December 2021 at 21:28

    Vince, the market value of land does reduce (or rise) with zoning decision already. Not sure what you are proposing here?

  33. Gravatar of stubydoo stubydoo
    22. December 2021 at 06:05

    What’s this about Democrats not liking “taxes that [move jobs from] industries that make luxury goods for the rich [into other industries]”? I’m a Democrat and I like those taxes just fine.

  34. Gravatar of Carl Carl
    22. December 2021 at 07:31

    “I’m not saying a land tax is a bad idea—it’s a good idea, but the politics are very difficult.” Agreed. But it does beg the question, how much revenue should the government be generating, which, of course, depends on the question how much should the government be spending. I’m curious if you have an assumption of what this should be. The wealthy countries all seem to fall in a band from about 33-50% of GDP although some of us seem to be covering a lot of the expenditures with debt.

  35. Gravatar of ssumner ssumner
    22. December 2021 at 11:25

    Stubydoo, Didn’t the Democrats in Congress lead the charge to repeal the luxury tax on yachts? And didn’t they cite the need to save jobs in the yacht making industry?

    Carl, I’d say the range is closer to 15% to 55%, if you include developed countries in East Asia. I favor spending closer to the low end of the range.



  36. Gravatar of vince vince
    22. December 2021 at 12:45

    Mathias said: “On the land tax: you can’t just take the current market price of the land and multiply by the proposed tax rate to get an estimate for revenue.

    The tax itself will have a big impact on the land prices.”

    The value woud be a pre-tax market value, of just the land. For fairness, implementation would require looking at winners and losers. Losers are landowners. Winners are income earners, which include landowners. I’d like to hear more about implementation.
    Some have suggested phasing it in while the income tax phases out.

  37. Gravatar of vince vince
    22. December 2021 at 12:55

    Mathias said: “the market value of land does reduce (or rise) with zoning decision already. Not sure what you are proposing here?”

    I was responding to ssumner’s example of a $200k ranch on a $500k lot, and suggestion that zoning may prevent the owner from generating the revenue to pay the land tax. That example was probably extreme to make a point. I was just mentioning that if zoning was so restrictive, the land value should not be $500k.

  38. Gravatar of vince vince
    22. December 2021 at 14:28

    stubydoo wrote: “What’s this about Democrats not liking “taxes that [move jobs from] industries that make luxury goods for the rich [into other industries]”? I’m a Democrat and I like those taxes just fine.”

    ssumner wrote : “Stubydoo, Didn’t the Democrats in Congress lead the charge to repeal the luxury tax on yachts? And didn’t they cite the need to save jobs in the yacht making industry?”

    Those yachts also would benefit from the Democrat proposal to jack up the income tax deduction for state and local taxes. Currently it’s $10k. They propose $80k.

  39. Gravatar of Carl Carl
    23. December 2021 at 10:10

    Good point. In the end, we eschew more efficient tax policies, like LVT, because it won’t raise enough revenue to support an inefficient government. Sad.

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