Taxing the Rich: Why It Might Backfire.

In The Trading Game, British author Gary Stevenson narrates his journey as a trader at a major U.S. bank in London. Stevenson has used his trading career as a springboard for his YouTube channel, Garys Economics, where he shares his views on wealth inequality. His popularity stems from his stance on hot-button issues, such as the idea that money is just a "token," that printing money equates to creating wealth, and that capitalism is the root problem. These views resonate with many, especially when he points out how inflation in prices hurts working people while benefiting the wealthy.

Stevenson's passion for addressing wealth inequality is evident, but like many, he offers solutions that are more reactionary than rooted in economic theory. Observing a problem is one thing, but solving it requires a deep understanding of its causes and a well-thought-out approach to tackling them. When it comes to economics, particularly the study of how individuals satisfy their wants in a world of limited resources, there's a tendency for people to mischaracterize the field. In discussions about wealth inequality, for instance, economics is often weaponized to advocate for redistributing wealth in a static, zero-sum game. This perspective, however, ignores the dynamic nature of wealth creation and the complex interplay of market forces.

In one of his recent videos, Stevenson advocates for a solution that has become a rallying cry for many: "Tax the rich!" He distinguishes between income and wealth, emphasizing that his target isn't necessarily those with high salaries, but rather those who own significant assets. This includes land, buildings, and other resources that, according to him, should be subject to higher taxes. He argues that while salaried people can leave the country, the wealthy—especially those whose assets are tied to the nation—cannot easily do so. However, this argument overlooks the reality that capital is mobile. Wealth can be moved to friendlier jurisdictions, and taxing it heavily could drive investment away, rather than retaining it.

Stevenson's disdain for "passive" income reveals a misunderstanding of how returns on assets work. Austrian economics teaches that returns arise from capital’s discounted marginal value product, which is determined by consumer valuations. Criticizing these returns ignores the fact that they are driven by consumer preferences and are not guaranteed, especially in an unhampered market. But in reality, the market is far from unhampered. The state, particularly through central banks and government treasuries, plays a significant role in distorting market forces. This is most evident in the bond market, where income derived from government debt stems from taxation and inflation, rather than from productive economic activity.

Frank Chodorov’s view that buying government debt is unethical is both shrewd and defensible. The British government, for instance, is heavily indebted and taxes its population heavily to service this debt. However, the burden of this taxation falls unevenly. Over half of British households are net recipients of tax revenue, while the shrinking middle class continues to shoulder much of the tax burden. It is true that taxpayers, including the middle class, are effectively paying the government’s creditors, many of whom are wealthy. But it’s misleading to pit wage earners against asset owners, as most wage earners also own assets.

A closer look at who owns the British government’s debt reveals that the largest holders are workers' pension funds and insurance companies (24%), the Bank of England (30%), and overseas holders (30%). The first group is largely composed of the middle class, while the second group remits interest income to the Treasury. This leaves the third group—foreign holders of debt—as the primary target of Stevenson’s proposed tax. However, this approach smacks of economic nationalism and fails to address the root of the problem: government overspending.

If the government spent less, it wouldn't need to run large deficits, and taxes could be lowered for everyone. But in the past 52 years, the British government has only run surpluses in three. This chronic overspending creates a fiscal illusion that hides the true cost of government and burdens successive generations with the debt of past expenditures. The central bank's role in this is crucial. To prevent a deflation in nominal GDP, central banks ensure broad money growth through credit markets and government debt monetization. This results in permanent inflation, which benefits big corporations, the wealthy, and the government at the expense of everyone else.

The most insidious consequence of this inflation is that it causes durable goods, such as real estate and financial assets, to trade at a premium compared to perishable goods. Labor, being the most perishable good, suffers the most. As Guido Hülsmann explains, labor cannot be stored, making it vulnerable to inflation. This creates a situation where wages are worth less in terms of durable assets over time, squeezing the middle class and raising barriers for younger generations.

Stevenson’s call to tax the rich may seem like a solution, but it’s a flawed one. Taxing capital would increase production costs, lower the supply of future consumption goods, and ultimately reduce real incomes. Labor depends on capital to increase productivity, and the U.K. already struggles with low productivity growth. The real solution lies not in shifting the tax burden but in reducing government spending, privatizing public assets, and encouraging private investment.

Stevenson’s proposal, while politically expedient, would likely lead to reduced investment, higher borrowing costs, and a weaker economy. Instead of taxing the rich, policymakers should focus on creating an environment that fosters growth, innovation, and economic stability.

Information was sourced from mises.org