Tax Reformers, Get Out of the Wealthy’s Way

Private business owners are more generous than the most progressive of tax schedules

Letter to The WSJ. 

"Your editorial “By All Means Raise Mitt Romney’s Taxes” (Dec. 22) correctly stresses that the rich pay a disproportionate share of taxes. Mr. Romney still argues that people like him should pony up even more. This view is central to socialism and frequent among economists, such as Thomas Piketty, who seem confused about how markets work. They assume government has a monopoly on service, neglecting that private business owners are more generous than the most progressive of tax schedules.

In the private sector you can only sell things if you help others—that is, if customers benefit more than they pay. If you’d cough up $100 for being able to brush your teeth but a toothbrush costs $5, you benefit 20 times as much as the sticker price. That sum, what economists call “consumer surplus,” averaged across industries is about 95% of the social value created by a business. 

But this is only part of how company owners help others. On average 60% of sales are wages, the best welfare program invented. Put differently, 98% of the value of starting a risky business benefits others, presumably more than the “fair share” of the rich’s labor than even communists dare propose.

Many politicians nevertheless act as if the only help that matters is given through the public sector, with them as middlemen. Never mind that help to the poor is often reduced by taxing the rich—money that would have been administered more effectively via private donations. The 250 billionaires of the Giving Pledge, launched by Bill Gates and Warren Buffett, are donating half their fortunes—surely more helpful than a 50% wealth tax.

If reformers understood markets, they would get out of the way of the superrich who are benefiting the public and resist any disincentives to their generosity. Their contributions to others are reflected proportionally in their accumulated wealth.

Tomas J. Philipson

Chicago

Mr. Philipson was a member of the White House Council of Economic Advisers, 2017-20, and its acting chairman, 2019-20."