Response to Andy Kessler on the Social Wealth Fund


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Andy Kessler wrote an opinion piece at the Wall Street Journal in which he briefly discusses the American Solidarity Fund. In response, I just want to clarify a few aspects of the program that he does not do a good job of explaining.

Here’s Kessler:

Not to be outdone, this summer the People’s Policy Project—Get it? Like the People’s Republic?—proposed an American Solidarity Fund. Every citizen over 17 would own a share of this sovereign-wealth fund. Slowly but surely, up to one-third of the assets of the U.S. economy would find their way into the fund. That’s $90 trillion for those keeping track at home. Then the investment returns from the fund would be paid out as, you guessed it, a universal basic dividend. This isn’t sliding a slippery slope toward socialism, it’s a trapdoor.

How would the fund get all those assets? Start with all government-owned land and buildings. Then add a 3% market-capitalization tax on public companies. Apple would owe $30 billion. Add a continuing 0.5% market-cap tax, a 5% levy on initial public offerings and 3% on mergers. Smells Marxian: “government owning the means of production.” So much for the ash heap. Then increase the death tax and get rid of every tax deduction. Heck, they better pay hefty universal basic lay-on-the-couch dividends because why would anyone ever go to work again? Companies would have minimal retained earnings to invest in the future, and workers wouldn’t keep much of their pay. The fund would shrink annually as the stock market imploded.

1. The levies can be paid in scrip.

The 3 percent market-cap tax, the 0.5 percent annual market-cap tax, the 5 percent levy on IPOs, and the 3 percent levy on mergers can all be paid in scrip or cash in the proposal. Paying in scrip means that a company can meet its obligations under the law by issuing new shares and giving them to the social wealth fund. This would involve no exchange of money. So, in the case of Apple, it would not have to pay the government $30 billion to satisfy the 3 percent market-cap tax. It would instead create new shares equal to 3 percent of its market-cap and contribute them to the fund.

When Kessler says “companies would have minimal retained earnings to invest in the future,” he appears to think that this is because they would be paying so much cash to the social wealth fund. But if they pay in scrip, their cashflows would be unaffected, and they would have just as much cash on hand to invest as they do now. The people paying the price of the market-cap taxes are the incumbent shareholders whose stake is diluted out, not the companies’ balance sheets.

As to whether this would implode the stock market, it is worth considering what just happened in the stock market in the last few weeks. Between October 9 and October 11, the S&P TMI, which tracks the public securities targeted by the market-cap taxes in the plan, fell by 5.2 percent. For incumbent shareholders, this dip was equivalent to if the companies covered by that index were subjected to a one-off 5.2 percent market-cap tax. By October 19, the index was still down 4 percent from October 9, and yet the sky has not fallen.

2. It does not eliminate every tax deduction

Kessler is probably taking creative liberties when he says the plan would “get rid of every tax deduction,” but it is worth emphasizing that this is not the case. The plan gets rid of virtually every tax deduction that exists to incentivize private asset accumulation, such as the mortgage interest tax deduction and the privileged tax treatment of investment accounts like 529s, 401ks, IRAs, and similar. These tax deductions do not appear to actually achieve their goal of incentivizing private savings at the margin, but instead flow as a windfall to those who would already save anyways, which is to say overwhelmingly to high-income families.

If you take the dollar value of those deductions and deposit them into the social wealth fund, then that increases the savings/wealth of every person in the country by an equal amount. So, in fact, the social wealth fund achieves the nominal goal of those deductions better than the deductions themselves.