“Transmutation” is the process of changing one substance, element, or form into another. We owe this word to the ancient pursuit of alchemy, which sought to accomplish the artificial production of gold from base metals. While it is now considered a pseudo-science, in our rational age, its aspirations survive in currently popular proposals for taxing billionaires.
The most advanced of these proposals is California Prop 40. Appearing on this fall’s ballot, if passed, would levy a “one time” balance sheet tax of five percent tax on taxpayers with ten or more figures to their name. US Rep. Ro Khanna (D-CA), in “Why I Support a Billionaire Wealth Tax,” likes the idea. He likes it a lot. But, unlike CA-40’s one-time imposition, Khanna’s projects the results for at least ten years:
This [tax] will raise $4.4 trillion over a decade. This is enough to establish a $60,000 salary floor for every public school teacher in America, cap child care at 7 percent of a family’s income, and restore the $1 trillion stripped from Medicaid and the ACA, with a $3,000 check left over for every household under $150,000.
The intention of these plans is to increase access to goods and services for those at the lower end of the income tier, at the expense of the wealthy. The revenue from CA 40, should there be any, is earmarked for,
Medi-Cal and other health coverage programs for low- and moderate-income individuals; health care access, benefits, and services; public education from K-14; and food assistance programs such as CalFresh, CalFAP, CalFood, or California’s Universal Meals Program for school meals.
Billionaires have a lot; working people, not so much. Take from one, give to the other. Make those at the bottom of the pile better off at the expense of those at the top. How hard can this be? As often is the case in economic matters, intended results differ from actual ones.
To determine if these measures achieve their stated goal, we must first ask: “What is the composition of the wealth being taxed?” The point is not just to transfer money. Advocates of these schemes want to increase the consumption of important goods, such as health care and housing. Where, exactly, will they get those things? Billionaires do not have them in large quantities. While the average billionaire might have a few houses, a private jet, a yacht, and some nice cars, their net worth is not a warehouse. Their net worth does not consist of hospitals, MRI machines, or pharmaceuticals.
Rep. Khanna’s arithmetic might be correct, or at least as correct as his assumptions. Where he runs into problems is in thinking that the net worth of billionaires can be transmuted. Stockpiles of unused consumer goods, such as health care, and housing, do not exist in the quantities that Khanna wants to provide. Likewise there do not exist large pools of the types of unemployed skilled labor needed in those fields. The super rich do not have on their payroll thousands of idle doctors, nurses, and teachers. Any trained health care providers whose license is in good order can find work if they wish to do so.
The key point that backers of these proposals miss is that the net worth of the wealthy consists almost entirely of capital goods or assets which are financial claims on capital goods. Capital goods are tools and infrastructure. Most of the durable wealth in the world consists of capital goods. A wealthy society means a society that has accumulated vast amounts of capital goods.
The BEA’s Fixed Assets Accounts reports the value of the US gross capital stock held by businesses, government, and households in 2024 at around $92 trillion. This total includes consumer fixed assets, consisting of residential housing, of $33 trillion. Whether housing is a capital good or a durable consumer good is debated, but, outside of housing almost all long duration wealth consists of capital goods.
Capital goods and labor are the variable factors in the production of consumer goods. A higher standard of living means more consumer goods per capita. This requires a greater concentration of capital goods per unit of labor.
All of the preceding points are true because capital goods are scarce, in the economic sense. Scarcity means that there exists only a finite amount of human and nonhuman resources which the best technical knowledge is capable of using to produce only limited maximum amounts of each economic good.
Factories, oil wells, and pharmaceutical plants are not the things that Khanna wants the tax recipients to have more of. The things he does want, such as medical care, schools and affordable housing, are scarce goods. At any time existing flows of these goods are consumed by someone. Taxing rich people and forcing them to sell assets does not immediately create any more of them.
To be clear on what can and can not happen, imposition of a tax can force rich people to sell some of their capital goods to pay a tax. Government actors can, then, take the monetary proceeds from the sale and use them to buy consumer goods that were already procured. Those consumer goods were procured with labor and other capital goods. It is these consumer goods that the government provides to the poor.
A tax cannot transmute capital goods into consumption goods. The government can only purchase consumer goods that were already produced, with the use of other scarce labor and capital goods.
Many popular criticisms of these taxation schemes circle around the target but fail to make a direct hit because they do not address the fundamental issues of the scarcity and heterogeneity of both capital and consumer goods. These critiques such as:
- rich people do not keep their entire net worth in cash;
- billionaires would have to sell off some of their assets to pay the tax;
- for every seller, there must be a buyer;
- for positions in the necessary size, there are a limited number of potential buyers
All true, without quite grasping the important part about why they are true.
If the beneficiaries of the tax receive funds are able to obtain more health care, they will not be displacing billionaires. Billionaires do not have stockpiles of—or consume billions of dollars of—health care. The working-class person who receives the tax benefit will displace the marginal existing consumer. Who is that consumer? That depends on which margin can the consumer be most easily displaced. That margin might be the price. Or it could be waiting time, connections, or the ability to work the system. If California is able to use revenue from this tax to hire a doctor from Missouri, then patients in MO will have one less doctor.
But wait—if there is more money to be spent on those goods won’t the free market economy respond by producing more of them? Yes, but that requires more capital goods and skilled labor. Those things that the rich were forced to sell to pay their “fair share.” Saving is the source of capital accumulation. This form of taxation would disincentivize saving in favor of consumption. Over the long term fewer consumption goods will be produced.
Another problem with Khanna’s ten-year projection is to assume a sustainable recurring revenue projection each year. Did he think that the base net worth that is subject to the tax will regenerate itself each year? One might similarly ask, do capital goods reproduce themselves without savings?
Can the first year’s haul be relied on, as Khanna does, for ten years? Probably not. That view ignores responses that would defeat the goal of the tax. First, the rich taxpayer might have to sell 8-9 percent of his net worth to pay the capital gains tax and have five percent left. In some years after tax return on a portfolio is nine percent but on average, it’s not. The investor’s base would not recover year after year of nine percent compounded erosion.
Second, Khanna assumes that asset prices would remain unchanged by this tax. Advocates of wealth taxation look at the net worth of billionaires as a fixed number of dollars. This is not so. The monetary value of businesses and assets is variable, not fixed. Each and every asset has a price, which changes from minute to minute in response to market conditions. According to Khanna, the $1 billion marker is only a proof of concept: the eventual tax boundary should be $50 million. As the tax cutoff goes lower, there would be more sellers and fewer potential buyers. If enough people want to, or are forced to sell at the same time, the only adjustment is higher real cash balances and lower asset prices.
Absent transmutation, there is a way for society to have more consumption goods. This is called “production.” Production is where labor and capital goods are provided as inputs into a process of manufacturing, moving, or arranging, according to a plan, to yield something useful at the other end. That is the way—the only way—for everyone, including those in the lower income tiers—to have more of the things that the tax cannot provide.
