Why Social Wealth Funds Are Not Just Taxes

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Matt Yglesias has a piece about social wealth funds at Vox:

If you want to redistribute stock market wealth, the parsimonious way to do it is through taxes. We already collect dividend and capital gains taxes, and we could raise the rates or create new super-elite brackets with higher rates or do whatever else we want.

Politically, I think this idea has gotten resonance because even though Bernie Sanders’s ideas are pretty standard welfare state liberalism, he, for odd historical reasons, calls himself a “socialist.” Sanders ran in the 2016 primary against Hillary Clinton, whom many people didn’t like for various reasons, so “socialism” became a cool trend. The SWF idea takes boring welfare state liberalism (tax the rich to pay for programs) and transmogrifies it into something that seems more socialist.

There are a couple issues here.

First, Bernie Sanders did run on much higher capital taxes (imposing a top rate of 64.2 percent), but Vox’s Dylan Matthews made sure to remind us two times (I, II) that these kinds of taxes are impossible:

David Kamin, a professor of tax law at NYU and a former economic adviser to President Obama, notes in a recent paper, “The Joint Committee on Taxation and Treasury both assume that the revenue-maximizing rate for capital gains revenue ranges from 28 to 32 percent.”

That’s much, much lower than the 64.2 percent top rate Sanders would enact, and much lower than the 49.2 percent rate he’d impose on many who are currently in the top 23.8 percent bracket.

This could actually reduce federal tax revenues, not by slowing growth but by deterring people from selling their assets and incurring capital gains tax. Because of that dynamic, the revenue-maximizing top rate for capital gains is about 28 to 32 percent, according to the Joint Committee on Taxation and the Treasury Department. Sanders raises the rate far, far above that, meaning that this part of his plan could actually cost the government money.

Now I don’t know if this is correct and I don’t know if Yglesias thinks it is correct, but it certainly is something that should at least be considered as potentially correct. Capitalists love to both legally and illegally avoid capital taxes and the nature of capital income makes it a lot easier to do so.

Thus, even if you think of the social wealth fund purely in revenue terms, it seems pretty clear that having a social wealth fund, in addition to capital taxes, is going to allow you to capture far more of the nation’s capital income for the public. Every asset the social wealth fund owns is equivalent to a 100% tax on that asset’s returns and it is very doubtful a tax rate that high would otherwise be viable. Or to put it in overall terms, if the social wealth fund owns 50 percent of the wealth and imposes the maximum possible capital tax of 32 percent (per Matthews), that is equivalent to a total tax rate of 66 percent, which is higher than the Bernie-favored rate that is said to be impossible.

The second issue is that the social wealth fund is not just about revenue, though it is fair for Yglesias to focus on that because that is all I had space for in my New York Times article about the concept. The other great thing about the social wealth fund is the prospect of control. Right now, America’s corporate sector is governed by a relatively small number of very affluent people, and their governance has been mostly awful of late (see Disgorge the Cash).

Bringing the public in as one of the governors of the corporate sector (alongside remaining private investors and labor) is both good in itself from a small-d democratic perspective and also probably good instrumentally as a way to get the corporate sector more interested in sustainable, long-term value creation. Norway’s management of its fund provides the most hope in this regard.