Who knows who coined the phrase, but “W-2 wealth” and “you don’t get rich off of W-2 income” is increasingly a thing. Or it seems that way. Executives (W-2) are often extraordinarily well-to-do, but if you want to be truly, filthy rich you must have an equity stake in something. Professional baseball players are W-2 rich and can sometimes claim tens of millions worth of annual income, but their employers are generally billionaires.
There’s rich, and then there’s superrich.
All of this rates discussion in consideration of how prominent Democrats increasingly view taxation. A recent Wall Street Journal report explained their vision for taxing the rich, and it’s apparent that income will no longer be enough. Democrats recognize that size amounts of wealth can’t really be found in W-2 income, but in ownership wealth. Ownership of a business, equity in a certain business, or highly appreciated shares in a company. About the rich, the Journal reports that the “Democrats want to shift toward taxing their wealth, instead of just their salaries and the income their assets generate.” Translated, the Democrats want to go after the wealth of billionaire MLB owners. The millionaire players aren’t rich enough.
Voters should be worried. Or skeptical. Or something. There’s no escaping taxation, and that’s true even if the vast majority of us won’t be taxed. If the Democrats ever succeed in imposing a “wealth tax” that actually succeeds in confiscating the wealth of the richest, watch out. No one will be spared.
Many moons ago Joseph Schumpeter observed that the “means required in order to start enterprise are typically provided by borrowing other people’s savings.” This shouldn’t require explanation, but companies and the jobs they must create in order to grow are a consequence of abstinence. That’s why everyone is victimized when politicians go after the rich. Think about it.
The above runs counter to what’s taught in economics class, or what’s read in the newspaper. What we read and what we’re taught is that tax cuts only work if they’re directed toward middle earners and the poor since each demographic will spend a lot of the untaxed income. But consumption doesn’t power economic growth. Investment is the source of growth. Tax the rich who have enormous unspent wealth, and you’re taxing investment.
Readers should remember this the next time some dopey economist or economist-worshipping pundit claims that consumption powers economic growth. To believe what is absurd is the equivalent of believing that Haiti’s poverty is a function of the people not getting the consumption memo from economists. No, Haitians consume very little precisely because they produce very little.
Importantly, another economic truth that cannot be refuted is Schumpeter’s about savings being a requirement for starting a business. For there to be entrepreneurs there must be abstinence on the part of someone or many someones so that an idea can morph into reality. And if anyone disagrees with any of this, please produce the list of prominent businesses that got that way sans copious investment.
So the Democrats want to tax wealth? That’s what they say. Elizabeth Warren, Bernie Sanders, and others say they want to go after the wealth of the superrich. It’s only fair, or something like that. They’re only going after the big fortunes. Ok, but if they do they’re saying they want to tax opportunity for everyone else. Sorry, but it’s true. Those with immense wealth have the means to invest immense amounts of wealth. Behind every great business is a story of a visionary founder or CEO finding the investment necessary to stave off bankruptcy. If wealth is taxed as the Democrats claim they’d like to do, there will necessarily be fewer dollars finding their way to innovative businesses with expansive visions for growth.
Notable here is that some Dems are allegedly more moderate, claim their vision is one of boosting the middle class, but their message is really no different from those more up front about their redistributive visions. Joe Biden comes to mind here. Though it’s unlikely he touches a fraction of the common hands he claims to, Biden fancies himself a man of the people. Apparently the truly naïve believe him. Eager to curry favor with the regular people, Biden argues that the “middle class” built America, not Wall Street. Actually, that’s not true. Wall Street’s core function is directing the savings of others to today’s and tomorrow’s companies. What investment bankers do is kind of heroic with the latter in mind, and very pro-middle class. Businesses are endlessly in search of unspent wealth, and Wall Street’s crucial role is one of skillfully helping large, small, and in-between corporations to attain capital in ways that maximize their ability to grow.
Biden is making the same argument as Sanders and Warren, but in stealth fashion. Yet anyone with a pulse should be able to see through the argument. They’re all saying they love jobs and opportunity, but with forked tongues. Out of the mouth’s other side, they’re saying opportunity will somehow be abundant in concert with the confiscation of wealth held by the proverbial MLB owner. Except that what they promise cannot be.
It’s the unspent wealth that is the source of all company formation, expansion, innovation. Abstinence once again fuels economic growth and the Democrats want to tax abstinence. Unknown is if any of the Democrats promising to tax savings will be asked about this obvious contradiction during the debates. The question is rhetorical.
Still, readers shouldn’t be fooled by the Dems’ rhetoric. Opportunity springs not from the W-2 rich, but from the owner/investor/inherited wealth rich. Keep this in mind the next time some politician promises to spread the wealth around through force. We all suffer taxes levied on those with the most.
John Tamny is editor of Real Clear Markets.