California’s proposed wealth tax has received a lot of criticism lately. From Gov. Gavin Newsom, who counts many billionaires as friends and donors, but Raised by a single mother Juggling three jobs, founder of Anduril Palmer Lackeystrong opposition, Google guys Larry Page and Sergey Brin vote with their feetmany of the Golden State’s super-rich are opposed to the policy. But what if this policy is ineffective once implemented? Here’s what budget experts say Kent Smythes think.
Professor and Academic Dean of the Wharton School Penn Wharton Budget Model (PWBM), speaking wealth He works out of his Philadelphia office and said recently that the measure is an inefficient revenue tool that stems from a “perfect storm of madness” in the current economic and social environment that makes “populist” ideas like this so sticky. When a country struggles to solve a severe budget shortfallSmetters warned that taxing the super-rich simply wouldn’t deliver the expected windfall. He said this was down to behavioral economics and the “illusion of money.”
Smetters’ PWBM is widely used in Washington, D.C., to analyze the fiscal and macroeconomic impacts of federal policy proposals. He brings extensive Beltway policy experience to this role, including serving as an economist at the Congressional Budget Office and as deputy assistant secretary for economic policy at the U.S. Department of the Treasury. he has Advise Congress on dynamic scoringwhom policymakers on both sides of the aisle consult when drafting major tax and spending legislation. Smetters describes much of PWBM’s work as private analysis, even “sandbox”, allowing lawmakers to discuss ideas before drafting bills. He is closely related to economic policy.
Smetters believes the main problem with wealth taxes is that they rarely meet revenue expectations. “When you think about the wealth tax itself,” he told wealth”, “It’s not a very efficient way to raise money over time, and it often doesn’t actually raise as much revenue as people think it does. He noted that many countries that adopted a wealth tax “abandoned it, in part because it brought in much less revenue than they thought.” ”
For example, many countries have abandoned wealth-targeted taxes, such as Austria 1994 Travel to Denmark and Germany 1997France 2018. As of June 2024, only four countries in the OECD have wealth taxes, and the United States does not have any wealth taxes on its books; it is Not sure if it’s constitutional. Smetters points out that almost all repealed wealth taxes have added less than or equal to 0.3% of GDP, and often much less, illustrating his point that there isn’t as much money in wealth taxes as people think. Additionally, administrative costs are high relative to revenues, particularly due to asset valuations and tax avoidance. Noting that most repeals are permanent rather than experimental reversals, he said France was an exception, replacing a general wealth tax with a narrow real estate tax.
Smetters cited some PWBM research that raises the question of what would happen if becoming a billionaire was illegal, as some far-left figures such as Zohran Mamdani have previously suggested. He said that if the federal government seized every dollar of more than $999 million from everyone (at current market value), the resulting “wealth grab” would only fund the federal government for about seven to eight months. “What people don’t realize is there’s not as much money out there as people think.”
a different path forward
Instead of “raising” income taxes or imposing a wealth tax on illiquid assets such as sports teams or startups, Smythes suggested that California could “get more broadly involved in taxation” and suggested the state consider more stable, broad-based options such as a hefty sales tax or a value-added tax (VAT). Smetters warned that without such discipline, the state’s reliance on a highly progressive and unstable tax system will continue to leave it vulnerable to changes in the economy.
Some progressive policy analysts and economists believe that the assumptions created by the PWBM under Smythes overstated the growth costs of deficits and taxes while underestimating the benefits of public investment, which they claim biased the model against expanding social spending. If anything, Smetters believes, PWBM is doing just the opposite. Critics argue that this biases PWBM results toward expanded social spending, while Smythes provides examples of spending that can boost economic growth if well-designed, including investments in preschool, health care, the environment, and some public goods. Pulse Width Modulation Analysis It has also been shown that, contrary to popular belief, more high-skilled immigrants generally raise all wages, including those of native-born workers.
Smetters said he is biased to some extent against the free market, jokingly calling himself “80 percent libertarian,” meaning he generally believes free market principles are most effective at increasing human welfare, with some regulatory exceptions, including pollution control and some investment in human capital, especially in young people. In contrast, much of government spending today goes to high-income people and the elderly.
Will the economy really be harmed? wealth Does the dramatic increase in living standards mean a life filled with annoying hidden expenses, Smetters asks, fueling widespread dissatisfaction with the economy and populist desires for a wealth tax? Smetters points out that even some conservative economists, e.g. Milton Friedman and Martin Feldstein (His own thesis advisor) had a very strong free-market orientation, “but they would basically agree that markets work well when you don’t cheat people and exploit people.”
A ‘perfect storm of madness’
When asked why he thought there was such a push for a billionaire tax, Smythes described what he saw as a “crazy perfect storm” involving the rise of artificial intelligence (AI) and the impact of social media. He said that concentration on the S&P 500 is one thing, that only 10 of the top companies have really driven all the gains in the three-year bull market since ChatGPT was launched, and that there is an existential fear (driven by tech billionaires) that artificial intelligence will replace everyone’s jobs. Smetters said this made people “unnecessarily anxious” that “we are being replaced by robots and so on.”
Standing in front of a bank of terminals conducting a budget analysis, Smetters insisted that “the reality is that AI is not going to be as impactful as people think.” Pointing to the computers around him, he noted, “I do have models running right now, so I’m a big user of AI,” but that many people “may be exaggerating the impact that it could have.” He distinguished between two types of technology: labor-augmenting and labor-replacing, and insisted that artificial intelligence was the former.
The economist cited a well-known phenomenon in behavioral economics that “money illusion,” people don’t believe they are actually getting richer because they are shocked by the higher prices they see around them. “In fact, our standard of living is much higher than it was 20 or 30 years ago,” Smythe said. Much of it isn’t well measured, he admits, and some items are priced at zero. “I’m not saying there aren’t problems,” he admits, but he says the world is a much different place now than it used to be. Growing up, his low-income family had to budget for issues like their cars breaking down all the time.
There is a similar, broader monetary illusion at work in the U.S. debate over who should be taxed and how much. “People don’t realize how progressive the U.S. income tax system is,” he said. He described it as “by far” the most progressive system in the OECD, meaning the rich pay a disproportionate amount of tax in the U.S. and poorer people pay less, sometimes because of things like Earned Income Tax Credit. He noted that the United States does receive much less revenue from its tax system than many other OECD countries. “You know, it’s hard to raise a lot of revenue under a progressive tax system like this… The whole idea of who pays taxes and the debate about it, is actually a very American debate.”