Taxing Wealth Makes Sense, But It Won’t Fix Our Economy

In June, Elon Musk became the world's first trillionaire, thanks to SpaceX's successful trading on the Nasdaq. Now, as the U.S. midterms approach, wealth taxation has entered the political arena. Californians will soon be voting on Proposition 40, a measure that would impose a 5% tax on fortunes exceeding $1 billion, with the majority of the revenue earmarked for the state's Medicaid program.

This initiative has sparked controversy among Silicon Valley billionaires, such as Sergey Brin, who have spent over $333 million campaigning against it, warning of dire consequences for the wealthy if the tax were to be implemented.

Such opposition is not entirely new. In fact, the income tax once faced similar criticisms, with the Supreme Court ruling it unconstitutional in 1895. It was only with the ratification of the 16th Amendment in 1913 that income taxation became commonplace. Proposition 40 may follow a similar path, becoming an accepted part of the tax system within a decade. Moreover, research suggests that the wealthiest households often pay lower effective tax rates than their employed counterparts.

The author supports Proposition 40 but believes that it is not enough to address the underlying economic problems. They argue that wealth taxation tries to recoup a share of value that has already been created, compounded, and defended, often with the assistance of legal teams. The origins of such extreme wealth are crucial to understand in light of the current push for redistribution.

The author uses the iPhone as an example, noting that its foundational technologies originated from public research, funded by the Defense Advanced Research Projects Agency (DARPA) in the 1970s. Similarly, Google's search algorithm grew out of a National Science Foundation project at Stanford, and SpaceX, which made Musk a trillionaire, received $396 million from NASA to develop the Falcon 9 and the Dragon capsule, among other costs.

The author contends that these tech billionaires have benefitted greatly from publicly financed research, turning it into substantial profits. However, they point out that the public has been left carrying the risk, as seen in the case of Solyndra, a solar panel manufacturer that collapsed, leaving taxpayers to absorb the loss. The author suggests that "algorithmic rents" – returns from owning platforms, data, and models that others must navigate – are another source of wealth for these billionaires.

The author criticizes the current capitalist system, arguing that it lacks fairness and requires a shift towards "pre-distribution." This concept involves attaching terms to public money, shaping how value is created and shared from the outset, rather than relying solely on taxes to rectify imbalances. The author proposes equity stakes in companies built on public loans, royalties on patents from publicly funded research, and a public fund that recycles returns into new rounds of risk.

They also suggest that the US has started to adopt this approach in its semiconductor infrastructure funding.

Ultimately, the author believes that this approach would address broader capitalist issues and create a different framework for wealth distribution. They differentiate this from universal basic income, which does not address the origins of individuals' fortunes, and a citizens' dividend, which pays out based on the premise that the public helped create the value. The author advocates for a more equitable system that directly addresses the debt owed to the public for creating wealth.