Davos WEF
Davos WEF

Billionaire Ray Dalio says tax changes like those proposed by Alexandria Ocasio-Cortez will have 'huge' impact on economy

Key Points
  • The "income and opportunity gap" will determine the winner of the next election, hedge fund billionaire Ray Dalio says.
  • "How tax rates are changed will have a huge effect on incentives and could have a huge effect on capital flows, and that will have big effects on markets and economies," says Dalio.
  • The manager of the world's biggest hedge fund spoke in an exclusive interview from the sidelines of the World Economic Forum in Davos.
Ray Dalio, founder of investment firm Bridgewater Associates, speaking at the WEF in Davos, Switzerland on Jan. 22, 2019.
Adam Galica | CNBC

DAVOS, Switzerland — Raising taxes on wealthy Americans in response to the defining issue of our time — income inequality — could have huge and unintended consequences on markets, according to billionaire Ray Dalio, founder of the world's biggest hedge fund.

Dalio, who runs $160 billion at Bridgewater Associates, believes the political reaction to the yawning gap between the haves and have-nots will likely determine who wins the 2020 presidential election. But he said there are serious impacts to be considered ahead of such changes, including Rep. Alexandria Ocasio-Cortez's proposed 70 percent tax rate on earnings above $10 million.

"How tax rates are changed will have a huge effect on incentives and could have a huge effect on capital flows, and that will have big effects on markets and economies," Dalio said in an interview on the sidelines of the World Economic Forum in Davos. "It's going to be a bigger market-influencing issue than people now realize."

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The 69-year-old hedge fund titan has been outspoken that the brand of capitalism that has allowed for the rise of a global class of super wealthy like himself hasn't worked out for most Americans. In November, he pointed out that the top 1/10th of 1 percent have a net worth equal to 90 percent of the population, a situation similar to the 1930s.

"This polarity issue — the income and opportunity gap — will determine who is elected and what approaches are going to be used to deal with that issue," Dalio said. "We have entered the presidential election cycle in which different policies and their probabilities of getting enacted to deal with this income-opportunity gap issue will be really important; probably the most important issue of our time."

Agreement on the problem

Dalio made the comments in response to a question about Ocasio-Cortez's proposal to roughly double the top tax rate, which she made during a recent interview on CBS' "60 Minutes." The idea appears to have bipartisan support: A recent poll found that 59 percent of voters were in favor of the idea, and even 45 percent of Republicans signaled approval.

The idea from Ocasio-Cortez, who identifies as a Democratic-Socialist, comes just a year after President Donald Trump's overhaul of corporate and personal taxes, which has allowed U.S. companies to save billions of dollars in taxes.

While other members of the financial elite in attendance at Davos, the annual gathering of 3,000 of the world's richest and most powerful people, called the idea scary or were dismissive of its chances, Dalio was more measured in his answer.

"We're in agreement on the problem that's behind that suggestion," Dalio said. "We have to make capitalism work for the majority of Americans. I don't know that we're in agreement on the mechanics."

In particular, Dalio is concerned about the unintended consequences of raising marginal taxes on the wealthy, and how the additional tax revenue will be used. U.S. productivity could be affected.

"If we're to have a 70 percent marginal tax rate, most individuals affected by it will calculate whether they should instead operate as a corporation in order try to convert ordinary income to capital gains, so I wonder how that will be handled," Dalio said. "And I wonder what will be done to influence whether capital will leave the country."

Dalio is not alone in worrying about the proposed tax hike. Former Federal Reserve Chairman Alan Greenspan said it would be a "terrible mistake" that would harm the economy.