The process of changing one substance, element, or form into another is known as “transmutation.” This term originates from the ancient pursuit of alchemy, which aimed to create gold from base metals. While alchemy is now considered a pseudo-science, its aspirations live on in current proposals for taxing billionaires.
One of the most advanced proposals is California’s Prop 40, which, if passed, would impose a one-time balance sheet tax of five percent on taxpayers with ten or more figures in their name. US Rep. Ro Khanna supports this idea, projecting revenue of $4.4 trillion over a decade for various public programs.
The goal of these plans is to provide better access to goods and services for those at the lower end of the income spectrum, funded by taxing the wealthy. However, the composition of the wealth being taxed must be considered. Billionaires do not possess large quantities of goods such as healthcare and housing. Their wealth mainly consists of capital goods or financial claims on capital goods.
Rep. Khanna’s assumption that the net worth of billionaires can be transmuted into consumer goods overlooks the scarcity of such goods. Capital goods are tools and infrastructure necessary for production, and a wealthy society has accumulated vast amounts of capital goods. Taxing the rich does not create more consumer goods immediately; it only redistributes existing resources.
Imposing a tax can force wealthy individuals to sell capital goods to pay taxes, but it does not magically transform those goods into consumer goods. The government can only purchase already-produced consumer goods with the proceeds from the tax. The scarcity and heterogeneity of both capital and consumer goods are fundamental issues that critics of these taxation schemes often overlook.
There are several critiques of wealth taxation that may not fully grasp the underlying reasons why they hold true:
- Rich individuals do not keep all their wealth in cash;
- Billionaires may need to sell off assets to cover the tax;
- There must be a buyer for every seller;
- There are limits to the number of potential buyers for assets of a certain size.
While these points are valid, they miss an important aspect of the issue. If the funds from the tax benefit recipients can access more healthcare, they will not be directly displacing billionaires who do not consume healthcare on such a massive scale. The working-class individual who benefits from the tax will instead displace the marginal existing consumer of healthcare. This could be in terms of price, waiting time, connections, or system manipulation. For example, if California uses tax revenue to hire a doctor from Missouri, patients in Missouri may experience a shortage of doctors.
Increasing funds for goods and services may prompt the market to produce more, but this requires additional capital and skilled labor—resources that the wealthy may have to sell to pay their taxes. Saving is essential for capital accumulation, and a tax that discourages saving in favor of consumption could lead to fewer goods being produced in the long run.
Another issue with the proposed ten-year revenue projection is the assumption of a sustainable income stream each year. Wealth does not regenerate automatically, just as capital goods do not reproduce without savings. Depending on annual tax revenue for ten years may not be feasible, as it overlooks possible responses that could undermine the tax’s effectiveness.
Furthermore, the assumption that asset prices will remain unaffected by the tax is flawed. Asset values are variable and respond to market conditions, which could lead to a decrease in prices if there are more sellers than buyers. Society can have more goods through production, where labor and capital are utilized to create useful products according to a plan.
Ultimately, production is the key to increasing goods and services for all income levels, offering a sustainable solution that taxation alone cannot provide.