The missing macroeconomic argument

Governor Newsom has called, per CNBC, for "a true minimum tax on billionaires" and the closing of "tax-free lifestyle loan" loopholes that allow the very wealthy to fund consumption through borrowing against appreciated assets — thereby realising the economic benefit of income while deferring, perhaps indefinitely, any tax liability on it. His framing is one of an "economic reset." That is the right instinct, even if it is not yet the right argument.

The case against such a tax will be made swiftly and confidently: capital will flee, investment will dry up, the risk-takers who animate the economy will be punished for their success. I understand this argument. I have always understood it. And there is a kernel of truth in it — tax design matters enormously, and a badly designed wealth levy can indeed distort capital allocation. But the argument, left there, commits the oldest error in economics: it treats the macroeconomy as a scaled-up household, in which every dollar taxed away is simply a dollar subtracted from productive use. That is not how a demand-constrained economy works.

The central question is not whether a billionaire could spend their wealth, but whether they will. The marginal propensity to consume — the share of an additional dollar of income actually spent back into the real economy — falls sharply as you ascend the wealth distribution. A household living paycheque to paycheque spends nearly everything it receives; a household worth fifty billion dollars cannot. Wealth concentrated at the very top tends to cycle through financial assets, not goods and services. It inflates balance sheets; it does not, of itself, clear labour markets. If taxation of that concentrated wealth finances public investment or transfers to those with a high propensity to spend, aggregate demand rises — and with it, output and employment. This is not redistribution as charity. It is demand management.

The "lifestyle loan" loophole that Newsom identifies (per the CNBC report) is a particular illustration of the problem. When the wealthy borrow against unrealised gains to fund consumption — yachts, properties, private aircraft — they access the economic power of their wealth without triggering the tax event that would fund the public services on which the rest of the economy depends. The collateral is never sold; the gain is never recognised; the estate, at death, benefits from a stepped-up basis that extinguishes the liability altogether. This is not a grey area. It is a structural feature of the tax code that severs the link between economic benefit and fiscal contribution. Closing it is not confiscation; it is coherence.

I should be honest about what I do not know. The engineering of a federal unrealised-gains tax — the valuation of illiquid assets, the treatment of privately held companies, the constitutional questions that American courts may yet raise — is well beyond what I can adjudicate. These are genuine technical difficulties, and they deserve serious legislative work, not hand-waving. What I can say, with confidence grounded in the macroeconomic principles I spent my life developing, is that the direction is correct. Demand-side economics has always recognised that the distribution of income and wealth is not merely a social question; it is a macroeconomic variable. When the distribution becomes sufficiently skewed, the economy's capacity to sustain its own demand through private spending alone is impaired.

The argument for a billionaires' minimum tax, then, is not primarily that it is fair — though it may well be — but that a modern state operating well below its employment potential, with crumbling public infrastructure and a private sector whose animal spirits are increasingly untethered from productive investment, cannot afford to leave the fiscal instrument unused. The revenue raised, if directed toward public investment, is not a drag on the economy. It is, very likely, the condition under which the economy can grow. That is the case Governor Newsom has not quite made. I would urge him to make it.