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By my knowledge of the current situation, the majority of the wealth in many countries is held by a few individuals with incredible amounts of wealth. Much of it is in the form of stock options and investments, but around 0.5 trillion dollars in wealth is held by just the top 5 billionaires in the United States. Those billionaires obviously have day-to-day living expenses, but none of them have ever spent or are ever likely to spend their complete savings. As such, if we factor in the other billionaires in America, it is reasonable to estimate that approximately 1 trillion dollars in wealth is not actively circulating in the economy. It's either in a savings account or generating new wealth that will stay with the same individual who is extremely unlikely to spend it.

If some of the proposed economic policies, such as Warren's wealth tax, were to be passed, a significant percentage (lets just call it 0.5 trillion dollars overall, for the sake of argument) of that wealth would be re-introduced to the economy. Is there a risk that this introduction could or would cause massive inflation as it was injected back into circulation? Why or why not? What policies have been proposed that would counter potential inflation risks, assuming they are a risk?

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  • Related (closed) question in Personal Finance & Money : What is the relationship between taxes and annual liquidation of the markets?
    – HAEM
    Commented Jan 17, 2020 at 14:18
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    This is much better suited on econ SE, where it would not have been closed. Commented Jan 17, 2020 at 18:08
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    Not off-topic! This IS about Politics!!
    – user25526
    Commented Jan 18, 2020 at 1:53
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    @ Maika Sakuranomiya: No, as written it is purely a question about economics. Now if the OP asked about the feasibility of getting such a confiscatory tax passed, that would be a political question.
    – jamesqf
    Commented Jan 18, 2020 at 4:12
  • It obviously depends on what happens to the money. If it is saved or used to pay off debts, there will be less inflationary pressure than if it is spent. And opponents of a wealth tax say it will discourage economic activity, which could be deflationary in the medium-long term.
    – Stuart F
    Commented Jul 1, 2022 at 12:30

2 Answers 2

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No. First, inflation is having too much of a currency, not too much wealth. In fact, inflation normally means that the amount of currency exceeds the growth of the economy. If your theory is that the billionaires' money is just lying around and being re-injected into the economy. Since only the government can create money, this money already exists in the economy.

Physical cash is valuable for one of three reasons: fiat (the government says it's worth something), currency-peg (the government says it's cash is worth so much of someone else's currency), or a commodity-standard (the government says it's worth so much of a thing that people will trade for, e.g. gold, silver, jewels, oil, rice). A commodity-standard is largely dead in the global economy, with most nations using fiat (the U.S. dollar is valuable because the government says it is, and the U.S. economy trades in it exclusively, and everyone wants a piece of the action) or will peg to a currency (the government will give you 2 PegBucks for every $1 you give them) and will then try to keep their ratio equal (if the purchasing power of a $1 this week falls to $0.99 next week, then 2 PegBucks will still buy the same amount of goods as $1... it's just a smaller amount of goods, so the price in Pegbucks and Dollars rises and falls at the same rate).

Now, all that said, most billionaires are not billionaires because they get money from other people and put it into a huge pile of coins and bills in a giant vault complete with diving board so they can swim in it. (Look, when you find out that the remake of Ducktales cast David Tennant as Scrooge McDuck, and the first episode is literally titled "Woo-hoo!", you sit down, shut up, and watch the duck swim. And actually, the Scrooge comics that Ducktales is based on do show a lot of problems with "simple solutions" of economies so... they do discuss how the famous Money Bin is a luxury... Scrooge can afford to swim in all that gold because he's got more money that's not sitting in his vault.)

In reality, most people are billionaires in "Net Worth" which means they don't have bank accounts with all their money stored in the bank... Stocks are only valuable because the company is valuable and a share (one stock) gets a cut of that profit. Even if you put it into a bank, it's not removed from the economy. Banks also give loans, remember. They aren't creating money, but using the money given to them by their account holders to invest in other ventures and charge loan holders interest on the money for as long as the loan is not returned (the idea is that the person can, within a set time, earn the money they are requesting, but they need the money now and will pay back a small portion of that money over time, plus a little extra... if you are putting money in the bank, you receive a cut of that returned interest because it's your money, not the bank's.).

Either way, a billionaire might be worth something close to 10 or 11 digits of value on paper, but that's not all cash on in the bank (aka liquid assets), and in fact much of it is tied up in other ventures. Let's say I have an assembly line that makes something, and one machine on the line costs $100,000, and I have five of these machines in my factory. My stock is a symbolic representation of everything my company is worth so if I have 51% controlling interest, then for every $100,000 machine, I own $51,000 of it. Multiply by 5 for my factory (($255,000 for all machines) and add that to the price to build my factory building, the price to own the land my factory on, the price of any other offices, all my personally owned stuff (fancy house, fancy car, cool toys) and my bank account values and that's my Net Worth, which can be millions or billions of dollars all totaled out. And some of that cannot be 100% recaptured (I'm not fixing my machines... I got a guy I can pay to do that for me... that's money that isn't coming back to me... but if I don't pay it then I can't make things and I sell those things to afford all this stuff.).

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  • In general, I agree, but the money supply is a slippery thing that isn't controlled by government with printing presses. Instead, to only slightly oversimplify, the money supply is increased every time that credit is extended, and decreased every time that debt is paid. Normally, this balances out, but a macroeconomic impact on billionaires could impact the money supply if it leads to greater extension of credit, or to greater payment of debt that would otherwise have occurred in the economy, which it would take empirical data to predict.
    – ohwilleke
    Commented Jun 30, 2022 at 23:56
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Taxing and spending are two separate things, and this question effectively asks about taxation. There is no obvious reason to think that taxing wealth that isn't being spent in the first place would impact inflation. We're effectively talking about transferring money from one bank account to another.

Of course, it is reasonable to expect that more government revenue could support more spending. Government spending increases in general do not automatically lead to inflation. If there were a very rapid increase in cash transfers where consumers are suddenly getting this money in their bank accounts (as a UBI for example), then yes there might be a risk of inflation in the short term, until production would increase in response to the rise in demand and prices. So I agree in this sense with the comment that this is more of an economics question then a politics one. There is no economic reason for advocates of wealth taxes to have to respond to the inflation question.

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