In the Federal Tax Debate, the Free-Market Side Is Being Played

Elon Musk’s enormous wealth will soon enough appear small. For evidence, see a popular chart listing the looming federal tax bills for multi-billionaires in the U.S. Musk will apparently be assessed $26 billion next year, Jeff Bezos $23 billion, and so on.

The enormity of the numbers is troubling, but more troubling is how free market types are addressing the numbers. They’re making the rather simplistic point that if Musk and other multi-billionaires faced a 100% wealth tax, their wealth would still only pay off a tiny fraction of the national debt. As always, they’re focused on symptoms.

If it’s true that the wealth of the U.S.’s multi-billionaires wouldn’t come close to making a dent in the national debt, stop and think about what the underlying, screaming market signal is about the $39 trillion worth of debt: federal tax revenue is a pale imitation of what it will be.

In a very real sense, that’s a positive. It’s a market signal that the wealth of Musk, Bezos, Gates, Ellison, Zuckerberg, and Huang is small relative to those who will follow them. Those who will soon enough be standing on their shoulders will achieve on a level that will make the achievements of America’s richest of today seem somewhat small by comparison. Think how much better our lives will be as a result.

Still, the taxation the future rich will face rates serious thought. How many times did Elon Musk’s various companies nearly die due to a lack of capital. With Musk top of mind, how many brilliant concepts will never see the light of day due to excessive taxation of the rich, the very people who provide 99.99999% of the capital that innovators rely on to turn their seemingly odd visions (yes, Jeff Bezos and Amazon were formerly laughed at) into world-changing realities.

Consider the above question through the prism of $39 trillion worth of debt. If the previous number doesn’t in any way faze investors, and it doesn’t, stop and contemplate what future tax revenues for Treasury will be. What enables individual and business debt is what enables government debt: market expectations of future revenue.

Translated, future wealth creation will once again be much greater than the wealth creation of today, and that’s once again a good thing. What’s bad, and the real crisis, is that the federal government will be a huge, multi-trillion-dollar beneficiary of all this wealth creation due to an abjectly stupid tax debate over the proper tax rate that annually takes place between the statist and free market ideologies. Doesn’t the free-market side see that it’s being played?  

Even the scholars at the libertarian Cato Institute continue to point to nominally low tax rates as evidence that the U.S. is not as heavily taxed as European countries. Except that tax rates miss the point. The point should be about how much tax revenue Treasury collects, and will collect. As the $39 trillion worth of debt yet again signals for those who follow markets, Treasury’s capacity to collect more tax revenues is in a very real sense in its infancy. Which is why the discussion shouldn’t be about a “balanced budget” the size of which will soon enough dwarf existing budgets, but tax revenue caps meant to limit government along with its capacity to borrow.

For now, the various religions are focused on how to get Washington more tax revenue to pay off the debt, which is the debaters revealing a blithe countenance to all the borrowing that occurred amid soaring revenue since 1981. Oh well, Treasury yields are telling us tax revenues will continue to soar, and they will because the free-market crowd is having a tax-rate debate wholly on the terms of an opposing religion that is much more cheerful about growing government. The big government side is sadly winning big due to the right’s near total misunderstanding of why there’s so much government, so much debt, and why both will continue to grow. 

Originally published on Real Clear Markets.