Bezos Schools the White House

By Tomas J. Philipson

Tuesday, May 31, 2022

 

As the White House is running through all possible causes of inflation except the real ones (its policies and the Fed’s), the latest and certainly most novel economic cause involves the rich paying too little in taxes. The White House’s inflation response is becoming a bit like having an arsonist put out fires.

 

Just as the White House lacks an understanding of the causes of inflation, it does not understand that the rich, such as Jeff Bezos, are already paying their fair share. Our country’s roughly 700 billionaires and the 1 percent they are part of are helping others more than the rest of us are, even if they paid nothing in taxes.

 

While the rich are often portrayed as not helping out, the argument is completely divorced from economic logic and assumes that sending taxes to Washington is the only way to help. Indeed, a large literature in economics finds that nearly all of the benefits of technological change, often spearheaded by entrepreneurs such as Bezos who wind up personally wealthy, are passed on to consumers through lower prices and access to new goods and services. In addition, the super-wealthy often give away much of what they earn as charitable donations — a more efficient way to help the poor than paying taxes.

 

In a capitalist economy, no one gets rich without helping others. If you would be willing to pay $10,000 for having a cell phone but bought it for $500, the difference of $9,500 is what economists call “consumer surplus” and represents the added value the company helped to give you — by definition free of charge. The companies created and/or operated by our richest citizens help others more than anyone in this way, and they create the opportunities and openings to help workers get jobs — the best welfare program available.

 

Just think of the recent examples of Covid vaccines with sales in the billions but restoring trillions in economic activity. As the Covid vaccines also illustrate, the rich are getting richer over time for a great reason — they now can help more people around the world through globalization, as opposed to only helping people closer to home. If someone paying a “fair share” means contributing an increasing share of the value he or she creates to others, capitalism itself is more progressive than any income-tax schedules devised by politicians.

 

But politicians in Washington, many of whom have work experience that has given them little connection with market logic, argue the rich are not helping others enough because the only help that matters, so far as they are concerned, is helping the government with more tax revenue. This self-interested argument is often used in attempts to shame people into going along with a higher-tax regime. And it’s finally produced a response from an unexpected source, Jeff Bezos, who points out that raising revenue is not the solution to all problems, particularly inflation. Bezos even goes as far as arguing that “the newly created Disinformation Board should review this tweet” in response to Biden’s call to stem inflation with billionaire taxation.

 

Often the lawmakers’ rhetoric is framed in ways that suggest that billionaires’ wealth should be redeployed in ways to help the government do more to improve the social safety net, rather than helping the poor through the private sector. But taxes don’t provide this sort of support as efficiently as private donations do. Taxes introduce middlemen, politicians, who use taxes for many other purposes than helping the poor. Private donations are far more focused on the poor than tax revenues.

 

In 2020, about 88 percent of the $470 billion in giving in the U.S. was by individuals and their foundations, largely focused on church, educational, and welfare activities for those most in need. In contrast, federal spending is sprayed across all incomes as well as on corporate welfare. Indeed, only about 17 percent of mandatory federal spending in 2019 was on poverty programs. This is likely smaller than the percentage of donated income spent on the poor. Thus, an extra $1 billion in taxes from billionaires would generate $170 million to the poor, but $1 billion in private donations would likely yield much more. Moreover, a donor can freely choose to allocate all of his donations to the poor, which he cannot when taxed.

 

Indeed, public spending on the poor is often less productive than believed. One study found that government spending crowds out private donations to charities by 75 percent. That’s because organizations that receive government money fundraise less, and people feel less prone to give when they feel they already helped out through taxation. What’s more, private giving is likely to be more in tune with local needs and communities. The Giving Pledge of Warren Buffett and Bill Gates currently has 227 billionaires who have committed to give away a majority of their wealth. This far more effectively helps the poor than a 50 percent wealth tax on those same individuals.

 

The bottom line is that billionaires help others, especially the poor, more than anyone both indirectly through the goods and services their companies provide but also directly through charitable giving.