Why Do Extremely Wealthy People Hate the Idea of Higher Marginal Tax Rates?

As I write this, Howard Schultz, billionaire and former CEO of Starbucks, is mounting an independent campaign for the presidency of the United States. And he seems to be running for that office because he’s horrified at the idea of paying a higher marginal tax rate on the part of the income that is over $10 million. And he isn’t alone in that horror. At the World Economic Forum in Davos, Switzerland, in January, billionaire Michael Dell was asked about that tax rate and quipped, “Name a country where that’s worked… ever” only to be corrected when MIT professor Erik Brynjolfasson replied, “The United States!”

According to Paul Krugman, taxing high incomes at extremely high rates—though below 100%—makes sense. On the one hand, at a certain point, there is no practical difference between the amount of money that an extremely wealthy person has and an infinite amount of money. Think about it this way: I have enough money that I would never notice if less than a dollar disappeared. I can afford far more of anything that costs a penny than I would want, which means that, for all practical purposes, I can afford an infinite number of things that cost a penny. For a billionaire, the same principle can be applied to items that cost hundreds of thousands, if not millions, or dollars.

On the other hand, the government still wants those people to bother earning that money so that it claim the revenue. In theory, a 100% tax would discourage people from working for that 10 million and first dollar. But since they would still work for 30% of the amount over $10,000,000, the government could tax the dollars over that amount at 70%, keep the incentive, and reap the taxes.

And that means, as Krugman puts it, that “the optimal tax rate on people with very high incomes is the rate that raises the maximum possible revenue.”

Now, Krugman knows far more about economics than I do, but I disagree with an important part of his assessment. For two reasons, once you’ve reached an annual income of $10,000,000—and probably far less—money isn’t really an incentive to work harder or longer. First, you don’t really control how much you make. Shultz’s income isn’t governed by how many hours he works or how hard he works during those hours. It’s governed by what decisions he makes regarding the investment of the money he already has (and he can even pay people to make those decisions for him). Second, he’s effectively living in a post-scarcity society, and just as spending a few thousand or million dollars doesn’t really mean anything to him, neither does making that money. I can’t prove it, but I really doubt that more meaningless money is really an incentive for the extremely wealthy. There has to be an entirely different incentive structure in place.

But that’s not the question I want to explore here. The question I want to explore is this: why are these billionaires so horrified by the idea of a higher marginal tax rate when that rate will mean effectively nothing in terms of their quality of life?

Over at Lawyers, Guns, and Money, Paul Campos proposes some ideas… which he then dismisses:

They want to make sure that their great-grandchildren have more money than they could possible squander? No, because great-grandchildren are usually an abstraction. People don’t really care about them.

They believe in some sort of supply-side economic model? Okay, but why do they believe in that economic model when it flies in the face of all available evidence?

They hate those kinds of taxes on principle? Okay, but what’s the actual principle for whose sake they object?

They’re greedy? Okay, but what does greed mean in a context where more money doesn’t mean anything?

Money is a way of ‘keeping score’? Okay, but that’s pathological in a context where money doesn’t mean anything.

You want to be able to buy something that really would put a dent in your wealth, like the presidency of the United States? Yes. That’s probably it.

I think that Campos is missing something here: there’s a cultural logic to wealthy people—especially extravagantly wealthy people—hating taxes. And it’s sort of related to ideas like greed and ‘keeping score’.

Now, I need to be careful here. What I’m about to say isn’t a bit of armchair psychology. I’m not about to suggest that people who are extremely wealthy believe certain things at either the conscious or subconscious level. Instead, what I’m about to suggest is a matter of cultural logic or social imagination. It’s wrapped up in the collection of all of the things—institutions, traditions, symbols, practices, and so on—that help us think of ourselves as an ‘us’… the shared, often unspoken, understandings of how things are and how things should be.

A big part of the social imaginaries of modern capitalism is the link between material wealth and personal value. To put that another way, the more wealth someone has, the more of a person they are. For example, we often talk about people being paid what their work is worth or, even, what they are worth.

Or, as another example, we act as though Mark Zuckerberg’s wealth qualifies him to talk about and influence education policy, healthcare reform, or whatever.

Or, as a final example, we imagine that a wealthy businessperson is qualified to be the president of the United States because he is a wealthy businessperson.

And I strongly suspect that link between material wealth and personal value is felt more strongly by people who are wealthy than by people who are not (partly because I suspect that we tend to find personal value in the things that we have a lot of, are good at, and so on).

If the social imaginaries that a person is embedded in sees a link between material wealth and personal value, then it makes sense that that person would see taxes as a bad thing. That person might even see taxation as a form of violence because, when the government demands money through taxation, it isn’t just taking money, it’s taking personhood. This is related to the notion of ‘keeping score’. The billionaire is a person partly because he’s a billionaire, and taking some of that money—making him a mere multi-millionaire—makes him worth less than his fellow billionaires, not just in terms of his material wealth, but in terms of his very personhood.

(This also helps explain why some people who are very wealthy don’t see a desperate need to fund social programs that help people living in poverty: those people are literally worth less than the extremely wealthy).

There’s a theological side to this: ‘The idea that material wealth is the same—or almost the same—as personhood’ is a pretty good description of greed, not just as a kind of personal vice, but as a sin. On the one hand, it’s a form of idolatry: material wealth is an object of worship. On the other hand, it’s a form of self-harm: instead of finding their value in their status as a bearer of the image of God, they find their value in their status as a bearer of material wealth. It is, perhaps, the most common sin: exchanging God for mammon.

So, what do we make of Schultz’s campaign? He’s afraid. He’s afraid that a popular uprising against the extravagantly wealthy will hurt him. Not literally, of course, but by taking away the source of his personhood. And while he’s right that such a popular upraising will begin a higher marginal tax rate, he’s wrong that it will hurt him in any way. In fact, giving up some of his wealth might even free him from the grip that wealth has on his soul. And it’s sad that he doesn’t see that. It’s almost enough to make me feel sorry for him.

Almost.

Why I Get Nervous about Importing Ideas from the For-Profit Sector

The Obama administration recently banned ITT Technical Institute schools from accepting new students who receive federal loans or grants. Since ITT relies on that federal money for about 68% of its revenue, this could end up forcing the closure of one of the largest for-profit college chains in the country.

This is important. But to understand why it’s important, it’s useful to understand how for-profit colleges like ITT make money.

When a student takes out a student loan, that money goes from the lender – in this case, the government, to the school. For a for-profit school, every student who pays tuition is a net plus.

A good school will provide something of value to those students: a good education ending with a degree that helps those students gain employment. The good school – especially if it’s nonprofit – may even rely on its graduates having good jobs and positive feelings for the school in order to keep going. It needs the voluntary donations of its alumni.

A bad school will maximize profit by keeping the cost of having students as low as possible. It won’t provide a good education ending with a degree that helps those students gain employment. The bad school doesn’t care about the life of it students after they graduate. It made its money as soon as they paid tuition.

The best move for the bad school is to find people who are desperate for a degree, charge the highest tuition they can, and provide very little in terms of education. If the student can pay that tuition herself, the school takes her money. If she can’t, the school can steer her towards a loan; that way, the school makes the money without assuming any additional risk.

Not all for-profit schools have to be bad, of course. And not all nonprofit schools are good. But the ethos that motivates a bad for-profit school like ITT is rooted in the need for profit: maximize revenue, minimize costs. In that regard, it’s no different from other for-profit institutions. If the interests of investors and students align, it might be great. If those interests don’t align, then the students end up debt-ridden, unemployed, and living in poverty.

And that’s why I get nervous about importing ideas from the for-profit sector.

Both Steve Rothschild (in his book The Non NonProfit) and Dan Pallotta (in his popular TED Talk “The Way We Do Charity Is Dead Wrong”) advocate for the idea of nonprofit organizations generating profit for investors. In principle, there are ways to do this that provide financial resources to nonprofits while generating profit for investors. Rothschild provides some examples that look promising.

But we need to be incredibly careful with ideas like this. When someone makes a donation to a nonprofit, his interests are aligned with the interests of the people the nonprofit serves. For example, when I make a donation to my alma mater, I’m doing that because I want students to receive a good education; the students also want to receive a good education. Our interests are aligned.

If I invest in my school with the goal of making a profit, however, my interests don’t necessarily align with those of the students. If providing lower quality services to the students generates more profit, my interests would be met without meeting the interests of the students. And that’s what happens with institutions like ITT.

I’m not saying we can never ever take inspiration from the for-profit sector. Maybe social impact bonds or human capital performance bonds have potential. But stories like this – where we see the for-profit sector taking advantage of low-income people in order to make a profit, in accordance with the most basic motives of the for-profit sector – should make us skeptical of claims that the for-profit sector has something to offer.

After all, it’s a truism to say that the point of the for-profit sector is not to do good, it’s to generate profit.

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