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Opinion: Tax the rich? Sure, but not this way

The Democratic plan in Congress would discourage investments and harm U.S. competitiveness abroad

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Sen. Joe Manchin, D-W.Va., center, speaks with reporters on Capitol Hill in Washington on Wednesday.

Sen. Joe Manchin, D-W.Va., center, speaks with reporters on Capitol Hill in Washington on Wednesday. Manchin’s objections to the expensive “Build Back Better” Act has forced Democrats to consider alternative funding mechanisms, such as a wealth tax on billionaires.

Patrick Semansky, Associated Press

Ronald Reagan put government tax policies into precise alignment when he said, “If you want more of something, subsidize it; if you want less of something, tax it.”

Democrats in Congress should take those words to heart as they deliberate how to pay for a pared down “Build Back Better” Act. 

Do they really want the ultra-rich to invest less?

That may well be the unintended consequence of a wealth tax, now taking center stage as a way to fund the massive expansion of a federal government that hasn’t yet figured out how to pay for what it already spends. 

The plan is to tax billionaires on the increased value of the stocks and bonds in their portfolios even though they haven’t yet cashed in on those investments. Often, the ultra-rich will borrow off those untaxed investments to live comfortably and tax-free.

Presumably, if Uncle Sam taxes interest that exists only on paper, the government also would have to provide refunds during those years when investments lose money, which might also create some perverse incentives.

The idea of taxing the investments of wealthy people has a certain feel-good, stick-it-to-the-man quality to it, but feeling good doesn’t always equate to solving a problem. It might even create more of them.

Like it or not, investments fuel business growth and provide the necessary capital for entrepreneurs to begin startups.

The Los Angeles Times editorial board, which noted that Larry Ellison, the billionaire chief executive of Oracle, financed a line of credit from $10 billion in company stock, and that Elon Musk, of Tesla fame, secured personal loans with more than $55 billion of his company’s stock, thought of a better solution.

“So why not tax gains on shares used to collateralize a loan or support some other transaction?” a recent Times editorial asked. “That would hew to the logic of the current system, and wouldn’t discourage taxpayers from making investments for the long term — it would simply prevent them from generating consumable income in a way that avoids taxes.”

Why not, indeed.

Do Democrats really want to follow a path many Western European countries have tried and abandoned?

Economist Milton Friedman once jokingly told me Americans shouldn’t try socialism because they aren’t as good at it as Western Europeans. But that shouldn’t be an excuse for not learning from their mistakes.

The Tax Foundation, a tax policy think tank, said 12 members of the Organization for Economic Co-operation and Development, or OECD, had such a tax in the ’90s. By 2019, only five did. An OECD report, the foundation said, “argues that these taxes can disincentivize risk-taking and entrepreneurship, harming innovation and impacting long-term growth.”

Do Democrats really want to hurt American competitiveness in the world? 

Since 2014, the Tax Foundation has published an annual International Tax Competitiveness Index that compares the tax systems of OECD countries in terms of how they promote development and are easy for taxpayers to use, among other things.

Following the Trump tax cuts in 2017, the U.S. rose from 31st out of 37 countries on the list to 24th. It now ranks 21st. But the foundation said this week the current Democratic plan would lower the U.S. to 32nd. 

The reason? The proposed changes to the tax code would make “the U.S. a less attractive place for businesses and workers.”

This isn’t because it would tax people more. Sweden, which imposes an extremely high tax burden on its people, ranks seventh on the list. However, its tax structure, “is less distortive to economic activity and worker decisions,” two important things in a world where businesses and workers aren’t afraid to move across borders.

Making the rich pay more in taxes is not necessarily a bad thing, if it’s done in a way that won’t distort the economy. But it’s not smart to rely on it for much revenue, considering the ultra rich make up a small subset of the population — one that constantly changes along with economic conditions.

The United States has a long and unique history of its wealthiest citizens turning into philanthropists. This started with Andrew Carnegie, who eventually gifted cities from coast to coast with 2,800 public libraries, and it continues today through efforts such as the Gates Foundation and Utah’s own Larry H. Miller Charities.

Taxing them more won’t necessarily end this largesse. But, as President Reagan understood so well, if you aren’t careful how you tax things, the results can end up doing things you never intended.