Why taxing wealth doesn’t make sense

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

14 March 2021

Financial wealth is not about having a lot of money in your wallet or in the bank! When it is reported that Jeff Bezos is worth over US$170 billion, that doesn’t mean he has this amount of money stashed away in a bank account. No! This is simply the perceived value of the stake he owns in Amazon.com Inc.

He formed the business in 1994 (perhaps with just a few thousand dollars) and operated it from the garage of his rented house. Over the years, the company has been a huge success and is currently valued at about US$1.55 trillion – yes, over one and a half trillion dollars!

Bezos has sold and given up his shareholding and, today, he owns only about 11.1 per cent. This is the portion that is worth over US$170 billion. But that value changes day-by-day (in fact, every hundredth of a second!) as the price of the shares fluctuates up and down in the stock markets of the world.

Mr. Bezos is not alone; the wealthiest people in any society generally have very little money in the bank compared to their net worth. It is not that they have accumulated so much wealth, but rather that other people are willing to pay a premium price for a portion of the property.

The story of Scrooge McDuck (the cartoon character who is Donald Duck's uncle) illustrates this very well. At last count, Scrooge was worth "one multiplujillion, nine obsquatumatillion, six hundred twenty-three dollars and sixty-two cents". He became that wealthy because each time he bought some shares in a company everyone would rush in to buy as well and that would push the price to the stratosphere!

The same happens to the rest of us as well. You buy a plot of land for, say, Sh100,000. Then, ten years later, similar plots in the same area are going for one million shillings. Can we say that “you have accumulated a million shillings”?

This is the reason why the popular idea of taxing people’s wealth doesn’t make much sense. The value of the wealth has little to do with the owner’s actions. It is more a result of how desperately others want a share of it!

Suppose the government started collecting, say, 10 per cent wealth tax. It would demand Sh100,000 from you for your one-million-shilling worth plot. This is the same amount you had paid to purchase the property ten years earlier. How would you feel about that? Would you even have the cash to pay the tax?