In defence of billionaires
The wealth of most of the super-rich comes from honest value creation. A tax on them wouldn’t work
People often bemoan that we are in an age of populism, in which voters are told that “real people” require defending from malevolent “others” who are to blame for society’s ills.
Hard-left populism’s enemy is the rich. With Richard Branson and Jeff Bezos firing themselves into space in recent weeks, US politicians have mused about “abolishing” billionaires here on Earth. How is space travel justified when other people are hungry, the collectivist populist asks? Backbench Labour MP Richard Burgon here advocates a 10pc wealth tax to cut the wealthy down to size.
Seeing Bezos, the world’s richest man, talking of colonising planets and thanking Amazon employees for helping his personal space launch, it’s easy to make the seductive intellectual leap that human misery elsewhere must be a consequence of top wealth. At the very least, surely “we” – in the form of governments – could spend the wealthy’s resources better.
But this misunderstands where billionaire wealth actually comes from. Look at any global list of the most wealthy, and you’ll certainly see some who got there through government cronyism that makes us poorer. Whether it’s Russian oligarchs, or even, partially, Elon Musk and the favours that Tesla squeezes out of local governments, state-granted privileges can enrich some over others to our economic detriment.
Yet the overwhelming majority of today’s top billionaires’ wealth actually stems from honest value creation – from providing the leadership, innovation and capital for goods or services that enrich our lives.
The top 20 richest people in the world includes the founders of Amazon, Google, Facebook, Tesla, Nike and Microsoft. The list of richest Brits includes those who set up Dyson, Virgin, Home Basics and Ineos.
Do they, and certain rich CEOS, “deserve” their fortunes? The High Pay Centre bemoans that FTSE 100 executives were paid 20 times the median employee in the 1980s, which has now risen to 120 times. Surely, CEOS are not relatively that much more talented than employees compared with three decades ago?
Market economies, though, don’t allocate resources by subjective “desert” or talent, but by value creation, determined by supply and demand. Business leaders are probably not more gifted or cunning relative to workers than in the 1980s, but globalised, connected markets mean the stakes in their decisions are higher. With larger markets come larger potential rewards, for similar reasons that Ronaldo’s bigger modern global football broadcast audience makes him relatively wealthier than Pele ever was.
Whatsapp founders Brian Acton and Jan Koum make a good case study. They launched a product that 2.5bn people use to freely communicate worldwide, generating $5bn (£3.6bn) to $10bn in annual revenue. The pair pocketed $15bn upon selling to
Facebook. Did they “deserve” it? It’s an unimaginable sum, but as Nobel Prize winning economist William Nordhaus has explained, transformative innovators like this are only capturing a tiny slither of the total productive value to customers.
Investors clearly think top CEOS matter a lot too. With technology and tastes changing quickly, firms’ prospects can hinge on a few decisions over whether to adopt risky new products or overhaul corporate practice. Observe the diverging fortunes of Blackberry and Apple.
When CEOS resign, get poached, or die, in fact, companies’ valuations shift in pronounced ways, suggestive of executives’ potential multiplicative impacts on businesses’ profitability. In 2013, Burberry CEO Angela Ahrendts left to join Apple, having overseen Burberry’s market valuation growing from £2bn to £7bn. Burberry’s share price fell 7pc.
It stands to reason that failure to compensate existing executives sufficiently harms value too. In 2019, Namal Nawana, then CEO of UK medical devices firm Smith and Nephew, resigned, saying his £1m plus base salary wasn’t enough. Under him, the company’s value had grown so much that even if his personal impact was just 1pc of it, the uplift was 10 times his base pay. His resignation wiped off £1.4bn in value.
These instances don’t reflect random stock volatility either. When CEOS experience unexpected family deaths distracting them from their jobs, stock prices shift.
Those with skin in the game then think founders and CEOS make a substantive difference to companies’ fortunes, even if the Left-wing populist doesn’t.
So what would “abolishing billionaires” achieve? The risks are clear: though not everyone is moneydriven, confiscation will disincentivise at least some of the socially productive activity driving high wealth.
With so much of billionaires’ current wealth locked in businesses ( just 2pc is in private property, such as houses and yachts), high-net wealth taxes would force firm sales, encourage more consumption, and incentivise billionaires to give more to tax-exempt, often political, causes. Why is this economically more desirable than reinvestment in productive business assets?
And for what public revenue gain? Confiscating all but a billion each from the top 10 British billionaires would have funded 2020 UK government spending for one and a half months. A more realistic annual wealth tax would be shot with exemptions to avoid harming asset rich, cash poor farmers and other essential businesses.
Wealth taxes were scrapped in most of Europe, in fact, as they became symbolic gestures, raising, on average, just 0.2pc of GDP, as millionaires and billionaires fled and carve-outs piled up. What would that sum pay for? The royal yacht and a few infrastructure projects?
The Left’s anti-wealth populism sells the public a pig in a poke. Economists have previously calculated that 83pc of the global Forbes billionaire list made money from productive activities, not political connections. Talk of abolishing billionaires runs aground on the historical experience of taxing wealth, let alone the implications of much cruder, blanket confiscation of resources.