There is a set of claims that commonly justifies low taxation on the rich in libertarian circles. The first is that the wealthy having money is better, because they invest more, leaving us all richer in the long term. This is true, and hypothetically extremely significant. But first, show me positive real interest rates. The second claim is subtler, but cleverer. There is extremely little real consumption of resources by the very wealthy, at least relative to those of slightly lower incomes. This means that, by taxing the rich heavily, one won’t actually free many real resources—in terms of capital and labor—for providing goods that the poor should care about, such as health insurance or smaller primary school classes. All that will occur is that demand for Armani gloves, apartments on the Upper East Side, Wesleyan and collegiate education, and Palm Springs bungalows will collapse. This means that while large amounts of money are spent by the wealthy, this money is not spent on a resource that anyone but the rich would care about. Little more labor goes into a Canada Goose jacket than one from Old Navy.
Remember that in today’s low interest rates, the only real uses a government like ours has for more revenue is limiting inflation—this is not a modern monetary theory position; this is a standard position among economists. Taxing the rich will have little real effect, because the inflation that concerns us is wage inflation, and no one is being paid wages for goods the rich consume. The money the rich spend essentially disappears into Harvard’s growing endowment, continuous rising prices for real-estate near fashionable oceans, the metropolitan opera house, and Milan (more specifically, the total value of money that “disappears” can be measured in the increase in value of goods which have already been produced: brand names, buildings, land, artwork, endowments, etc). Essentially, an entire shadow economy made out of words and reputations instead of labor and capital shrinks occurs one taxes plutocrats. But nothing much else happens.
This argument is factually correct, but morally incorrect. It is of course, an oversimplification. Obviously, Jeff Bezos has a bunch of houses and a private jet and someone had to build them. They do, to some extent, consume actual tradable resources. But more importantly, there is a resource which the very rich consume far more of than anyone else.
Status. Status is rather different from material goods, because we’ve all decided that caring about it is not a legitimate economic priority. This is dumb.
The most defensible reason to be concerned with status is possible threats to democracy. High status inequality is a recipe for a few individuals to have more influence upon government figures, journalists, etc. This need not come through force, or exertion of power. Politicians and journalists have strong incentives to cozy up to oligarchs because they want to hang out with them. But I don’t really care about this reason.
There is a bigger welfare loss to consider. Let’s understand how legislation affects status markets. Let us imagine one situation, called, for no particular reason, 1968, where the richest people are making only around $1,000,000 annually. That means prices for status goods must fall drastically (sorry, Wesleyan budget office). Middle or upper-middle class individuals who are most concerned with status may choose to live in tiny apartments in nice neighborhoods, sending their children to the best schools, and eating nothing but peanut butter, and thus purchase as many status goods as more materially concerned rich people. This means that people’s status relative to material prosperity should much more accurately map to preference.
Second, status rankings are vague, opaque, and dependent on subculture. If I buy some status goods that I think are more important (a house in Wellesley) and you buy ones that you think are more important (an education at Wellesley) then both of us can consider ourselves to be fancier than the other. However, in an environment of much greater inequality (especially within the highest decile), you buy the house in Wellesley and the education, and I have to gentrify Southie. You believe yourself to have the same status you believed in before, while I now am forced to realize that you’re cooler than I am. This effect is amplified by the presence of subcultures. Imagine, in 1968, you’re a bohemian, I have taste. You buy your formless sculpture, I buy colonial furniture, and we both think we’re cooler than the other. In high inequality, you get both, and I just watch you, sitting in chairs from Ikea.
This vagueness and variation (and an assumption of human self-aggrandizing) means we should expect decreasing marginal returns for status goods. You don’t really care between considering yourself cooler than me versus it being painfully obvious, but I do.
But high status inequality is not as troublesome as high-status inequality and an obvious status market. Let us consider an alternative situation, called, for no particular reason, 1918. In this situation, there is extremely high inequality of status (literally aristocracy) but status is non-tradable. You can’t pay your way out of being ostracized. In a shame-based society like the Anglophone world, having status be so easily bought creates massive incentive issues. It’s much easier to expect business executives to act within reasonable ethics when there are important things that cannot be bought. (I understand that, for the exact same reasons, we should expect high taxes to diminish work ethic. But everyone is working hard enough!) You can’t sustain a free democratic society when the incentives for anti-social behavior are so extremely strong. And we are currently seeing this happen.
Thomas Hanes can be reached at email@example.com.