clock menu more-arrow no yes mobile

Filed under:

Are billionaires best at deciding what to do with money?

Rich guys, unsurprisingly, not into taxes.

A photo of Elon Musk smiling.
Billionaire Elon Musk has feelings about taxing billionaires.
Patrick Pleul/Picture Alliance via Getty Images
Emily Stewart covered business and economics for Vox and wrote the newsletter The Big Squeeze, examining the ways ordinary people are being squeezed under capitalism. Before joining Vox, she worked for TheStreet.

Lawmakers are again talking about taxing billionaires, and billionaires have some feelings about it — namely, they’d rather not. It looks like they’re going to get their way, too.

It’s a familiar sentiment among the super-rich whenever there are discussions like this: They’re maybe open to the idea of taxing people like themselves more, but they’re not quite sold on any specific proposals. On taxes, Bill Gates turns into Goldilocks: There are soups, chairs, and beds out there that work, but so far, it doesn’t seem like he’s found one that’s just right — it’s hard not to wonder if Bill’s just really not into soup.

Democrats in Congress are currently weighing ideas to tax the wealthy as part of a plan to pay for President Joe Biden’s Build Back Better agenda. Democrats are hoping to push through a sweeping budget reconciliation bill that would make important social and climate investments, though the details of the legislation are still being hammered out (as is the question of whether all 50 Democrats in the Senate can come together to pass it).

On Wednesday, Sen. Ron Wyden (D-OR), who chairs the Senate Finance Committee, put forth an idea for a tax on billionaires that would impact the 700 richest Americans. It’s not the same as the wealth tax Sen. Elizabeth Warren (D-MA) has pushed for, but it’s a similar idea in spirit: get billionaires to pay more taxes on the enormous wealth they’ve accumulated.

But it appears the idea has been nixed from the bill, as the White House on Thursday released a framework that instead outlined other proposals for raising money, including a millionaires surtax that would affect what the administration says is about 0.02 percent of Americans, and increased funding for the IRS. What will eventually wind up in the final bill remains unclear.

Some billionaires, predictably, have all week been sounding the alarm about raising their taxes, especially amid chatter of Wyden’s billionaires tax. They say their money is better off with them than with the federal government. Plus, they say, they don’t know what the money would go to anyway. The details of the reconciliation bill are still in flux, but mainly, the money would be directed toward social spending, such as universal pre-K and housing assistance, and climate. What’s more, they are, in a way, objecting to the core idea of taxes, which is that it’s money used by the government as the government sees fit, ideally for the benefit of broader society. Random individuals, whatever amount of money they have, don’t get to decide where the money goes.

Tesla CEO Elon Musk warned on Twitter, “Eventually, they run out of other people’s money and then they come for you,” leaning into a slippery-slope argument that once the government starts taxing billionaires, they’ll go even further. In a follow-up, he wrote that the question comes down to “who is best at capital allocation — government or entrepreneurs.”

Musk wasn’t alone in his handwringing about the possibility that the federal government could compel him to part with some of his mounds of cash to fund, say, an expanded child tax credit, or long-term care for seniors. Ray Dalio, the founder of the hedge fund Bridgewater Associates, said at Saudi Arabia’s flagship investment conference that he just wasn’t sure the government would do a decent job with the money, according to Bloomberg. “I would support anything that is going to have the effect of being spent on increasing, creating equal opportunity and greater productivity,” Dalio said. “If it accomplishes those things, I would support it. I’m not sure that it does.”

Larry Fink, CEO of BlackRock, echoed the sentiment. “If we could find solutions where the money could be directed in a proper way, I have more to give,” Fink said, noting that he pays about 55 percent in taxes now because he lives in New York City. “I think when we talk about taxes, we always just think about it at the federal level. I’m not even sure where that money is well spent now.” Goldman Sachs CEO David Solomon, who is a multi-millionaire, not a billionaire, said it’s hard to answer tax questions in a “black-and-white way” because “it depends on what you’re spending it on.”

This rich-guy hemming and hawing probably won’t matter much — lawmakers appear to have scrapped the billionaires tax plan for the moment anyway, and the idea would likely be challenged in the courts. Still, these are arguments that come up again and again and again. Meanwhile, the reality is that America’s ultra-wealthy tend to do a good job of avoiding paying a lot of taxes they already owe — often with tactics and loopholes that are perfectly legal.

Billionaires aren’t necessarily the best at spending their money

Plenty of America’s ultra-wealthy also express theoretical openness to paying more taxes, but they never seem to really like any specific plans. They and many others say that they think they’re better at spending their money anyway. Still, spending on a spaceship doesn’t solve child hunger, and billionaire philanthropic endeavors often have more to do with a rich guy’s personal concerns and interests than what others might consider the most pressing needs.

“The government is not taking money from billionaires like Musk in order to invest for itself, that’s not the proposal. The proposal is to have Musk and other billionaires pay some of the costs of helping out the poor, it’s redistribution,” said Edward McCaffery, a law professor at the University of Southern California.

As it stands now, much of the wealth of billionaires such as Warren Buffett, Mark Zuckerberg, and Musk is tied up in stocks. So when Tesla’s stock, for example, skyrockets, so does Musk’s net worth. But as long as he doesn’t sell his Tesla stock, he’s not taxed on it. Instead, many billionaires rely on what’s called a “buy, borrow, die” strategy, where to fund their lifestyles, they take out cheap loans against their assets. That way, they can avoid selling investments and getting taxed, which would be more expensive.

When they die and their assets are passed on to their heirs, their heirs are only hit with the capital gains tax when they sell — and only on the gains they’ve made since the original owner’s death. For a hypothetical example, let’s say $1 billion of Musk’s stock gains go to his kids, and they turn around and sell it for $1.1 billion — they’re only taxed on the $0.1 billion. A lot of super-rich people use this type of strategy to avoid taxes — ProPublica did a series on it earlier this year.

Many of the country’s and the world’s ultra-rich have signed the Giving Pledge, an idea concocted by Gates and Buffett for rich people to commit to giving the majority of their wealth to philanthropy or charitable causes within their lifetimes or when they die. As Vox’s Kelsey Piper laid out in 2019, it’s a modest ask, with modest effects. “Most of the billionaires who’ve taken the Giving Pledge are giving away their money quite slowly. That’s at least in part because giving away billions of dollars while ensuring the money is well-spent is a hard task,” Piper wrote. “There are promising giving opportunities that can absorb billions in additional funding, many of them identified since 2010. But billionaires largely haven’t overcome their instinctive wariness of spending fast on things they haven’t vetted — and so even the best-intentioned among them are spending down their fortunes relatively slowly.”

One exception here may be MacKenzie Scott, Jeff Bezos’ ex-wife, who has been giving away a lot of money very quickly. That she’s the exception sort of proves the rule — if everyone were doing what she’s doing, what she’s doing wouldn’t be a big deal. (Still, critics argue she could be more transparent about her reasoning and who’s advising her.) More broadly, it’s just difficult to give away a lot of money effectively and fast.

What’s more, what a billionaire thinks is a good cause to give money to might not be what others consider the most pressing needs. Philanthropists can serve to fund the sort of moonshot ideas that the government might not be willing or able to spend on, and develop real, important projects that help the country and the world. However, they can also throw money at pet projects that don’t really help a lot of people, such as donating to big-name universities with enormous endowments and getting a building named after them. Critics note that rich people also get a big tax break for giving.

Despite increased scrutiny on billionaire philanthropy, billionaires continue to insist they know best. “It’s not, ‘I invest better than the government.’ It’s, ‘I need the money, or I can use the money, or the world is a better world in which I have the money than if these people have the money for their health care and their education and child care and so forth,’” McCaffery said.

Perhaps more concretely, wealthy people’s spending isn’t limited to giving back or growing their businesses and creating jobs. They’re also spending on lavish lifestyles, picking up islands, and putting money into projects that the world doesn’t really need. Take the example of the current billionaire space race, with Bezos, Musk, and Richard Branson all taking part. The billionaire “I am better at deploying capital than the government” argument might be more compelling were it not for the recent spate of rich-guy field trips to space.

Billionaires have a decent idea of where their taxes would go

As for the assertion by some rich guys that it’s not clear where taxes would go, it’s not really true. While the details of the reconciliation bill are still being hammered out, in broad strokes, the answer is items such as an expanded child tax credit, health care, climate, and other social spending. “They don’t know where the money would go?” one congressional aide said in an email to Vox. “It would go to the child tax credit for their employees, among other things.” It is also worth noting that even after these taxes, these billionaires would still be billionaires.

“The government needs money to fund the programs all of us depend on, and so whenever the government raises from the public, somebody is parting with the money for public expenditure,” Rosenthal said. “It’s hard for me to believe that billionaires parting with some of their dollars would result in the government destroying capitalism.”

If, say, Musk were hit with such a high tax bill that he was forced to sell enough of his stock and somehow lost control of Tesla, there’s an argument to be made that it could be bad for someone else to manage it, Rosenthal said. “I think there’s something to be said [for] that argument, but it’s not as simple as saying the private sector knows better what to do with money than the public sector,” he said.

Dorothy Brown, a law professor at Emory University and author of The Whiteness of Wealth, pointed out in an email that people who pay taxes on their wages (as in, most people) “don’t have the luxury of not being able to pay our taxes because we are skeptical of how the government spends our money.”

To be sure, what taxes on whom will be added to the final bill is far from certain. It’s notoriously hard to raise taxes, even on the people who can afford it most. Still, taxing rich people is a popular idea, and one that isn’t going away, despite rich-guy protests.

“Billionaires are not better at deploying capital than the government,” Brown said, explaining that it is often billionaire messes the government is seeking to fix with their tax dollars, especially when it comes to the economy. “Think the 2008 recession or Bezos’ treatment of warehouse workers. Our tax system is built upon ability to pay and those with the greatest ability to pay — billionaires — structure their affairs so that they pay the least. The rest of us are tired of paying taxes for them.”

Sign up for the newsletter Today, Explained

Understand the world with a daily explainer plus the most compelling stories of the day.