Bezos Was Wrong, and Biden Was Right: Taxing the Wealthy Will Help Tame Inflation

Bezos said such policies don’t have anything to do with inflation, but he was wrong. Biden’s proposed 39.6 percent marginal rate would tax income above $400,000, which, yes, sets the floor way too high but would nonetheless capture a good chunk of those free-spending five percenters. As for the corporate rate, Summers explained, it’s generally assumed “that every dollar of stock market wealth generates between 3 and 5 cents of extra consumption.” Which isn’t nothing. “Everyone would agree,” Summers said, “that progressive taxes reduce demand by something.”

One likely reason for 2021’s surge in revenue was investors’ expectation last year that a capital gains increase would be included in the Build Back Better bill that many of us assumed (wrongly) would pass in some form. “If you thought that the capital gains rate was going to go up in 2022,” Summers told me, “you would sell in 2021.” Now we’re left with the inflationary effect of an expected tax hike without the tax hike itself. That’s the worst of both worlds.

How are the five percenters allocating their wealth in 2022? On the one hand, it’s unlikely there will be any capital gains hike in 2023 because the Democrats will probably lose what little control of Congress Democratic Senators Joe Manchin and Kyrsten Sinema allow them now. That leaves the five percenters with no reason to engage in another defensive stock sell-off. On the other hand, the capital gains rate will remain 21 percent—so low that the penalty for selling off stock won’t do much to dampen any impulses the five percent have to continue consuming. (Their chief obstacle now will be that stock prices have fallen.) When you’re even moderately rich, it’s never really a bad time to repaper the living room or to vacation in Crete. That means it’s never really a bad time to increase five percenters’ taxes and discourage such inflationary consumption at the margins. It would make the tax system a bit fairer, it would lower the deficit, and it might lend the Federal Reserve a helping hand in bringing down the inflation rate. It sure as hell wouldn’t hurt.