Mises Wire

Home | Wire | Who Pays Wealth Tax: The Rich or the Poor?

Who Pays Wealth Tax: The Rich or the Poor?

  • tax burden

Tags CapitalismLabor and WagesTaxes and Spending

11/30/2022
Listen to the Audio Mises Wire version of this article.

The Spanish government’s announcement that it plans to introduce a new “solidarity tax” on the wealth of those who possess over €3 million has again brought to the fore the debate about taxes levied on wealth and capital. The issue is not merely that the announcement is highly politicized in what is already, de facto, a preelection period, nor that it could disrupt the fiscal autonomy of Madrid, Andalusia, and Galicia. (Let us recall that these regions comprise eighteen million Spanish people; that is, almost 38 percent of Spain’s total population.)

Neither must we focus on the possible illegality or even unconstitutionality of the tax due to its potentially confiscatory nature. Nor is the main question the fact that people have already paid taxes (for instance, personal income tax) on their accumulated wealth during the process of its formation, and, at the time, in many cases, these taxes absorbed practically half the income of the current owners—the vast majority of whom are today older people and widows who, after a lifetime of effort, saving, and sacrifice, are now “rich” because they have over €3 million.

Nor, in short, is the issue that our politicians have employed a certain demagogy rooted in the moral disease of envy and in antisocial and divisive class warfare and have then attempted to sweeten and legitimize this demagogy semantically with the term “solidarity tax.” (Who could dare to not promote solidarity?)

No. The main argument against any tax on the stock of accumulated wealth or capital is none of those mentioned above, but the harm such a tax does to workers and, especially, the poorest, most vulnerable, and most disadvantaged among them. Employment, job quality, and wage levels depend directly on the volume of wealth and of capital wisely invested by its owners and provided to workers in the form of ever more sophisticated machinery, manufacturing plants, natural resources, computer equipment, etc.

In a market economy, wages tend to be determined by the productivity of each worker, and a continuous, sustainable rise in productivity can take place only if there is an increasingly large and sophisticated set of capital goods available to each worker.

If an Indian farmer earns only three euros a day, and an American farmer earns a hundred times that amount, the cause is not that the American worker is smarter or works more hours. It is simply that, on average, he or she enjoys the use of one hundred times as much capital equipment (for instance, a powerful, state-of-the-art tractor with the most modern accessories) as the Indian counterpart (who lacks this sophisticated equipment and is often obliged to go on plowing with animals and harvesting virtually by hand). And the huge difference in their wages derives from the fact that, with a cutting-edge tractor, the American farmer can plow an area one hundred times larger than the one the Indian farmer can plow with his or her rudimentary tools. But the cutting-edge tractor has been made possible only because several capitalists have accumulated wealth and capital and made them available to the American farmer in the form of tractors, which are simply sophisticated capital goods that dramatically increase productivity and, thus, the wages of the fortunate worker.

This reasoning sums up one of the most important teachings of economic science and illustrates the perennial piece of great popular wisdom that poor people do not so much need to be given a fish, which would satisfy their immediate hunger, but a fishing rod (that is, a capital good), which would solve their hunger problem once and for all. Here, again, science proves the best antidote to partisan demagogy.

If, for example, the owner of Zara, Amancio Ortega has a fortune of €60 billion, it would do no good to expropriate the entire amount and distribute it, say, among the two billion people who are, relatively speaking, the poorest in the world. Each person would receive a mere thirty euros, but the cost of this poverty-generating act would be heavy, since it would require the disappearance, liquidation, and closing of this distinguished capitalist’s countless factories, facilities, and buildings, which, quite fortunately for his tens of thousands of employees and millions of customers, continue daily to generate wealth and well-being far and wide, and thus to boost the productivity and wages of many.

Therefore, if we wish to fight poverty and promote prosperity—particularly the prosperity of those with lower wages—we must treat all taxpayers with great care, especially the “rich” ones, by supporting them in their accumulation of wealth and avoiding any persecution or social condemnation.

In short, any tax levied on the accumulation of wealth or capital, such as the existing wealth tax or the announced “solidarity” tax, always ends up exerting a harmful impact on workers, particularly the most vulnerable in relative terms, who would benefit the most from an increase in their productivity if they had more and better capital equipment.

Moreover, it makes no difference whether capital or wealth is comprised, as is most common, of securities, investment funds, bank deposits, or real estate, since all of these represent an entire constellation of specific capital equipment that invariably requires the collaboration of labor, increases employment and the quality of labor, and, above all, makes possible rises in workers’ productivity and, as a result, in their wages.

And in contrast, a tax like the one announced—a 3.5 percent tax on “large fortunes”—would, in under ten years, and by simple arithmetic, result in a reduction of more than one-third of the capital that could have been accumulated in the absence of such a wealth tax. And in turn, this reduction would generate the accompanying decrease in productivity and in real wages with respect to their potential level. Hence, we must conclude that wealth taxes are always ultimately paid—and handsomely—by workers, and therefore are harmful and, above all, they are the antithesis of solidarity toward the poorest and most vulnerable.

Author:

Contact Jesús Huerta de Soto

Jesús Huerta de Soto, professor of economics at King Juan Carlos University, is Spain's leading Austrian economist, and a Senior Fellow of the Mises Institute. As an author, translator, publisher, and teacher, he also ranks among the world's most active ambassadors for classical liberalism. He is the author of Money, Bank Credit, and Economic Cycles, as well as Socialism, Economic Calculation and Entrepreneurship (Edward Elgar 2010), The Austrian School (Edward Elgar 2008) and The Theory of Dynamic Efficiency (Routledge 2009).

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
Image source:
Adobe Stock
When commenting, please post a concise, civil, and informative comment. Full comment policy here