Let's suppose Elizabeth Warren's proposal for a wealth tax becomes law. It's pretty picayune compared to what we have been discussing in this blog i.e., a wholesale substitution of a net wealth tax for income tax. But let us suppose. I read a blog or Twitter post the other day, somewhat gloating over the fact that Jeff Bezos, the Amazon chairperson, would apparently owe some hundreds of millions of dollars of tax under Warren's scheme. The one small problem is that he hasn't got hundreds of millions of dollars - his Amazon holding is nothing like that value in terms of ordinary productive value.
So he can sell some shares? To raise money to pay the tax? I vividly recall my old corporations law professor at Berkeley, Jesse Choper, who taught the class in a wonderfully theatrical manner, responding to a student's improvident suggestion that oppressed minority shareholders could sell out - "SELL? TO WHOM??? WHO THE HELL WANTS TO BUY THIS PROBLEM?"
Just so. Bezos isn't going to find any willing buyers for a fractional interest, because they're buying a liability, not an asset. This aspect of the tax is going to hit a lot of people if the floor is set at $50,000,000 and it will ripple down through the market. Buyers and sellers both will confront a raw, explosive reality - Bezos' multibillion dollar holding of a non-dividend paying, non-redeemable common stock isn't worth anything like its present market, without a greater fool willing to buy it at that premium. The same holds true for Apple, Amazon, Facebook, a legion of high-tech start ups and others, none of which generate a cash flow or item of value that remotely justifies the present trading value.
Right now, it's wonderful to own several tens of millions of dollars of stock in a glamor company. It's a liquid store of wealth that you can sell or hypothecate at the time of your choosing, turning the stock into real property, funds for higher education, nice concrete items of consumption and use. True confession: I'm the beneficiary of this oddity. Back in 1983, as lawyer, I founded Borland International, a software company that Philippe Kahn turned into a real force in high tech. I took a small number of founder's shares at a nominal price. Borland was a spectacular innovative company, and I am very proud of my role in its success. But in terms of returns to shareholders, it never paid a dividend and never redeemed a share. It was never acquired. Nonetheless, in 1992 I sold the holding for a seven figure sum and did indeed reinvest in a home, college funds, and so on. What with splits and recaps, the basis in the initial shares was so low by that time - 1/40th of a cent a share - that I did not bother to report it on my return. A few years later, management lost its way, and Borland went under. Though I am not planning on returning the funds, the brutal reality is that the shares that I sold never did have any realistic value.
Neither do many of the stocks being traded today, at least not remotely close to the share price at which they trade. They're tulip bulbs. So many private and public expectations are based on those values that no one likes to admit how divorced from financial reality they really are. But a Net Wealth Tax brings that brutal fact brutally home. (Of course, what is true of high profile stocks is also true of other non-productive stores of value - art masterworks, stamp and coin collections, other collectibles, and so on. It's one thing to pay $100,000,000 dollars for a Rembrandt when it hangs in your study. It's quite another when you may have to pay up to $6,000,000 every year for the privilege.)
It's my own intuition that at the end of the day, taxing wealth has a profound effect on the meaning of fiat money. I think it results in the grounding of the value of money in the basic rate of return on capital. But this is an intuition only. Proving it out one way or another is way, way beyond me. That's why the academic economists to whom I have distributed this have been so burdened. These posts are like rocks thrown in the pond, spreading concentric circles, in the hope that one of them will touch someone who has the ability to do something with this.
Would this reduction of money and value be a Good Thing or Bad Thing for our entrepreneurial capitalist society? Again,a question beyond my paygrade. A friend and frequent correspondent, Josh Galanter, puts the affirmative case effectively:
The other concern is that a wealth tax will encourage a shift of wealth from non-productive stores of value to productive investments. Think of wealthy people who might own something like gold as an inflation hedge. Because it is a non-productive asset, its expected return is zero over the long term, which means that under a wealth tax, its value will erode by some fixed percentage every year, now making it a poor store of value. Thus there will be a strong incentive to take that gold, which is sitting there losing value over time (because it is being taxed) and put it into a more productive use. It might, instead, be invested in a startup. Sure, the startup might go bankrupt, but it also has a finite probability of bringing a huge return. Since the value of the money just sitting there is declining, this is actually a strong incentive to put the money to use. I actually see that as a feature, not a bug. Would it be such a bad thing if the value of assets not being used productively was decimated?
Well put. But a contrary case can be made. Our society has done extraordinarily well in the last 40 years by holding out the promise of windfall rewards to entrepreneurial success that lie off the beaten path - in some spectacular cases, forge a path where none was known to exist. Many of the successful technological companies of the last few years succeeded by demonstrating the viability of markets that did not exist when the companies were formed, e.g, personal computers, video games, social media, and so on. The absence of a pre-existing market or even a perceived social need distinguishes this type of entrepreneur from other shifts in the social paradigm, for example, the shift to steam and railroads from horse-drawn .Maybe the promise of an extraordinary, 'bonanza' return is necessary to lure entrepreneurs and venture capitalists into places where conventional angels fear to tread.
Maybe so, but my own instinct is to side with Josh. For my two cents, the wild increase in wealth inequality the United States has experienced in the last two generations may well be due to the fact that we have developed a two track monetary system. A lucky minority of people are playing the game with funny money , which they take to the pari-mutuel window at the end of the day, and turn into real goods - houses, college educations, second homes in Bermuda. The rest of us deal in cold, hard cash, rooted in individual productivity, without anything like the expansive potential of non-productive money.
I don't think venture capital is going to disappear if a Net Wealth Tax is enacted. What we will see (I would bet) is a return to the traditional corporate financing template, stocks promising a healthy dividend perhaps combined with put options at different levels as the venture attains various milestones. That is the form of traditional American capitalism. It has considerable vitality. In any case, financial realism to my way of thinking beats financial fantasy.
In any case, taxing wealth comprehensively and annually will result in a tremendous revaluation of stores of value, inevitably resulting in a shift away from non-productive assets. Whether the change is desirable or not, how comprehensive it would be - I will leave that to others better qualified. But my hunch is that the change is one of the most desirable features of the Net Wealth Tax.