The Scrooge McDuck Fallacy (and why wealth taxes are a bad idea)

Wealth taxes, on the living or the dead, reduce levels of investment in productive assets, undermine economic stability and won’t raise the money their advocates claim

There’s a persistent myth about wealth that we might call the Scrooge McDuck Fallacy. Scrooge McDuck sits on his gold pile counting his millions, swims in a pool of gold and throws the bullion around shouting ‘I’m rich’. This is the perception of wealth held by many people. Such folk believe that Jeff Bezos or Elon Musk have a vault somewhere, probably on some Caribbean island, containing all their billions. Billions that they keep away from the grasping hands of governments thereby stopping those governments from helping the poor as well as resulting in higher taxes on people without gold-filled vaults.

All of this is, of course, nonsense. It isn’t that people don’t have a suitcase of cash and valuables but that most wealth is, in essence, the working capital that keeps business, commerce and agriculture going. Sadly, this doesn’t stop people from really believing there’s billions to be got in taxes if only government brought in a tax on wealth. Hardly a day passes without another supposed ‘economist’ telling us that, in effect, the wealth of billionaires is just free money crying out to be seized. Ignoring that much of that wealth is the paper value of the companies in which it is invested and that taxing wealth simply results in less investment.

Misunderstanding wealth is very common. People confuse wealth with high income and fail to realise (despite Scrooge McDuck making it clear) that wealth is a stock. It is largely true that if you have five quid in your pocket and no debt, you are wealthier than half the world’s population. So when Oxfam or some other left-wing campaign group talk about who controls wealth they fail to appreciate that plenty of income rich people don’t have much wealth. What those high income people are banking on is that they will generate enough income to pay off the 25 year, million pound mortgage and build the business so they can sell it to pay back the mountain of debt they borrowed to buy that business. 

This gets us to another misunderstanding about wealth - that it is all in the hands of old people. It is, of course, disproportionately held by the old but this is simply a reflection that they’ve been around long enough to pay off the mortgage and sell the business. The question we should ask isn’t ‘why do old people hold so much wealth’ but ‘how is it that the next generations are struggling to accumulate wealth’. In theory the same opportunities exist for thirty- and forty-somethings to save and invest, to buy property and to build businesses they can sell. If they are not doing this then there is probably some regulatory barrier preventing them from behaving normally. Millennials aren’t all stupid after all.

Which brings us to taxes and the argument that wealth should be taxed. We might call this the Willie Sutton Principle after the notorious American bank robber who when asked why he robbed banks replied “that’s where the money is”. Since wealthy people have all the money it makes obvious sense for governments to take some of that money rather than tax ‘hard-working families’ or ‘ordinary working people’. All that lovely money sitting in that Caribbean vault would be better used to fund ‘Our NHS’ wouldn’t it? Except there’s a problem. The wealth of those billionaires isn’t sat in a vault but is invested in something (and the billionaires or their companies are taxed on the returns from that investment), so taking some of it to spend on knee operations or welfare payments for single mums means less is invested. So less returns, less profits, less R&D, less economic growth and, ultimately, less tax. Wealth is a stock, once you’ve taxed it away, it isn’t there any more.

Even if you tax the four-bed homes of boomers (which probably aren’t generating much in the way of return on investment) your tax is either, in the manner of property taxes like council tax, paid out of income or else the owner of the wealth must sell the asset to pay the tax. And we probably don’t want to be forcing some widow woman to sell her home to pay some taxes. Nor do we want the same for the small business owners, nibbling away at the value of their business makes little sense economically, causes enormous stress and probably won’t raise much money.

Ah, say the advocates of wealth taxes, it isn’t those people we’re after. The wealth tax should be targeted at the Duke of Westminster with all that land on which he doesn’t pay tax (except he does) and those billionaires with Caribbean islands and gold-plated swimming pools. The problem, other than that there is no literal store filled with cash, is that the billionaires’ wealth is a function of their business activity. The value of SpaceX, Amazon, Meta and Microsoft determines the amount of wealth held by their billionaire owners and those businesses only create that wealth by creating value for their customers. If everybody stopped using Facebook the value of Meta will fall and the wealth of its owners will do likewise.

Taxing wealth to prop up the revenues of government is a bad place to start. Taxing wealth to spend on nurses, doctors, police officers and assorted bureaucrats simply shifts money away from creating consumer value which, as sure as eggs is eggs, results in less of that value being created. We get to tax the income of billionaires and to levy duties on their spending but some seem to think that we should have a slice of their wealth despite that wealth being a huge chunk of the world’s working capital. And this is before we consider whether we are in a position to tax that wealth. The big tech businesses like Amazon and Meta make loads of money from providing their services in the UK but neither the owners nor the businesses are based in that country - we would be chasing illusory wealth (or rather wealth quite rightly held in another country and subject to their tax rules).

Of course the state has a cunning plan to get its mitts on your wealth - wait until you die. But this raises another problem because the inheritance isn’t all cash. So rather than sustain the investment in the business, inheritance tax requires that the business is sold so as to pay the lump sum demanded by government. This rather kills the idea of a family business sustained over generations and, while such businesses are not as common as many suppose, this represents a socially regressive approach from the state. But you’re dead so neither you nor the government care (in the case of the government not caring, of course, applied before you were dead too). Nevertheless forcing the liquidation of working capital so as to pay a tax bill is something that makes zero economic sense.

Wealth taxes - on the living or the dead - are a bad idea. They reduce levels of investment in productive assets, undermine economic stability and won’t raise the money their advocates claim. The likes of Richard Burgon claim that seizing millions from the assets of billionaires will sort the state’s finances. But in doing so billions would be removed from investment in the economy, the nation would simply be chewing its own leg off to indulge its collective greed. What we should be doing is trying to work out how we square the circle of rising demand for state entitlements and a reducing base from which we take the taxes to provide those entitlements. Taxing wealth won’t help, it will just make things worse.