Warren's Wealth Tax Only Makes Sense if the American Dream is Dead

Who wants to be a millionaire? Everyone. Who should be a millionaire? No one.

That at least seems to be the underlying aim of Sen. Elizabeth Warren’s (D-MA) “Ultra-Millionaire Tax.” The most recent round in the bare-knuckle brawl over the distribution of American billions started last month when the presidential candidate laid out her plan to improve the public education system, an $800 billion plan that she says will be completely funded as part of the projected $2.75 trillion in revenue from her proposed tax on America’s wealthiest citizens.

Her targets were quick to voice their outrage at being handed the bill for the public education system. In a subsequent interview, Bill Gates, the primary philanthropist funding the largest charitable organization in the world, said, “I've paid over $10 billion in taxes. I've paid more than anyone in taxes. If I had to pay $20 billion, it's fine. But when you say I should pay $100 billion, then I'm starting to do a little math over what I have left over."

And last month, billionaire investor Mark Cuban blasted Warren, tweeting, “…the Senator is like every other candidate. She is selling shiny objects to divert attention from reality.”

Finance-savvy academics were quick to pull out their calculators and crunch the numbers on exactly how much Warren’s “shiny objects” would cost affluent Americans like Gates and Cuban. Although there is certainly room to argue over the specific numbers and implications of Warren’s wealth tax, too little attention is given to the fundamental assumption underlying such a tax: that wealth accumulation is a zero-sum game.

Warren and her fellow wealth-tax proponents assume there is an impenetrable barrier dividing the “haves” from the “have nots.” So any gain in wealth to the “haves” means an irreparable loss to the “have nots.” In such a world, it would simply be right and just for government to balance the wealth between these two defined classes.

But such assumptions are far from reality. There is no clear and impermeable barrier between classes. Indeed, those who are and are not among the wealthiest Americans changes over time. Indeed, over their lifetimes, according to research conducted by Thomas Hirschl, a sociologist at Cornell University. Hirschl found that 11 percent of Americans will rank among the top 1 percent of wealth holders in the US for at least one year during their lives. And among those who make it into the top 1 percent, only 5.8 percent will stay there for more than two years, and only 1.1 percent will be there for over ten years.

Hirschl finds that even the top 0.01 percent of wealth holders (a group that Warren’s tax would specifically target) don’t always stay that way. Evaluating the top 400 wealthiest taxpayers over a 22 year period ending in 2013, he found that 72 percent ranked amongst this elite group for only a year and that less than 3 percent remained in this category for more than a decade.

There also is a significant shift in wealth among the middle class, with 39 percent finding themselves in the top five percent income bracket for at least a year and 56 percent making it to the top ten percent and a remarkable 73 percent earning their way into the top 20 percent at some point in their lifetimes.

Free markets drive these income changes. Within a capitalist society, it is very hard to consistently offer more value than your competitors. The result is a constantly shifting flow of wealth to and from different individuals.

The “Top One Percent” is far less a static social class than a momentary state of affluence enjoyed by one out of every ten Americans at some point in their lives. With such a seemingly hopeful reality, why would Warren and so many others choose the minimal short-term gain of redistributed wealth over the long-term opportunity for wealth creation?

The answer arises from the interplay between reality and perception. The prevailing social narrative in the United States was once “The American Dream,” the shared ideal that freedom grants every individual the opportunity to build a more prosperous future. In reality, this dream is not dead: A recent Pew Research study finds that on average 84 percent of adults in the US exceed the income of their parents. This is particularly true of the most impoverished, with 94 percent of those whose lives began in the lowest income quintile going on to earn a higher income than their parents.

Nonetheless, it seems that the prevailing perception of future social mobility is somewhat more pessimistic. In another recent survey, Pew Research Center finds that only 20 percent of adults in the US believe that the standard of living for the average American family will improve over the next 30 years, while 44 percent believe that it will get worse, and 35 percent believe it will remain roughly the same.

While the idea of taxing and redistributing the wealth of billionaires might sound alluring, average Americans don’t need another a wealth tax, but a dedicated effort to remove the barriers that prevent individuals from enjoying flourishing lives. These barriers come in the form of unnecessary occupational licensing, industry-crushing regulation, and supply-constricting zoning laws. Removing these barriers would mark the first practical steps toward reclaiming the belief that our best chance for a prosperous future lies in giving every individual the opportunity to create value.

When we remember the raw potential within every American, Warren’s “Ultra-Millionaire Tax” looks more like an envy tax on individual opportunity. Her proposition for redistribution, far from elevating the American citizen, would be a crushing blow to the continued realization of the American dream.

Photo by Stephen Maturen/Getty Images