Would You Accept a Wealth Tax?

Felix Salmon at Reuters has a post up this afternoon that asks why the Wall Street Journal is referring to the proposal to place a surtax on various levels of income as a wealth tax. He contends it’s an income tax and I would have to agree with him.

I don’t know why the WSJ would call it a wealth tax. As you know, a wealth tax is just a tax on your accumulated wealth. For instance you might have been a very successful something or other and worked hard and accumulated a lot of money even after you paid income taxes. You invest wisely in stocks, bonds, collectibles and maybe real estate and after twenty or thirty years you are a very wealthy person. Then the government finds itself strapped for cash and decides that they will institute a tax on the net worth or wealth of everyone above a certain level. Presto, you get nailed again.

Felix sees some merit in this idea:

This is an income tax, pure and simple, not a wealth tax. Personally I think a modest wealth tax, in conjunction with an income tax, makes a certain amount of sense. Why tax income, which people work hard for, but not unearned wealth? But in any case, this isn’t a wealth tax, and I don’t understand why it’s being characterized as one.

(emphasis added)

I’m not quite sure what constitutes unearned wealth. It seems to me the only way to accumulate wealth is to earn it via hard work or diligent investing but what do I know.

Anyway, how would you feel about a real wealth tax?

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About Tom Lindmark 401 Articles

I’m not sure that credentials mean much when it comes to writing about things but people seem to want to see them, so briefly here are mine. I have an undergraduate degree in economics from an undistinguished Midwestern university and masters in international business from an equally undistinguished Southwestern University. I spent a number of years working for large banks lending to lots of different industries. For the past few years, I’ve been engaged in real estate finance – primarily for commercial projects. Like a lot of other finance guys, I’m looking for a job at this point in time.

Given all of that, I suggest that you take what I write with the appropriate grain of salt. I try and figure out what’s behind the news but suspect that I’m often delusional. Nevertheless, I keep throwing things out there and occasionally it sticks. I do read the comments that readers leave and to the extent I can reply to them. I also reply to all emails so feel free to contact me if you want to discuss something at more length. Oh, I also have a very thick skin, so if you disagree feel free to say so.

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4 Comments on Would You Accept a Wealth Tax?

  1. The reason that taxing wealth rather than income makes sense is because the primary economic benefit derived from the existence of government is property rights and the degree to which individuals benefit from the existence of property rights is proportional to their net wealth. For example, Bill Gates benefits from the existence of property-rights guarantees to a much greater degree (i.e. in absolute dollar terms) than your average citizen. It consequently makes a certain amount of sense to pay for the general expenditures of government via a tax on wealth rather than income. Benefits that are proportional to income (e.g. social security benefits), it makes more sense to use a payroll (income) tax.

    Hopefully this makes sense.

    Loftin Graham

    • I hadn’t thought of it that way before.

      Seems like it’s an extension of the rationale for having a progressive income tax (rather than a flat one). Bill Gates benefits more (in absolute dollar terms) from having an interstate highway system (for shipping his software) and federally subsidized airports (for the disproportionate amount of traveling he does) than the average Joe, so he’s expected to contribute more to funding them.

      I would also point out that the wealth tax alluded to is not suggested to be anywhere near as high as typical income tax rates…something like 0.4% or 0.8% if I remember correctly.

      And someone correct me if I’m wrong, but as I understand it, most (though not all) of U.S. wealth is in the form of inherited funds. I think this is the source of the confusion over the term, ‘unearned wealth’. The estate tax is the clearest wealth tax example that we have today. The next best example is probably property taxes–every year, homeowners pay a tax based on land and housing price appreciation (whether they sell that land/house or not).

      What I really lament is the ubiquitous thinking out there on how ”they” are taxing away what I have worked so hard to get. In a functioning democracy, April 15 wouldn’t be the demonized day it is today–it’d be the day we get together to provide resources for the programs we collectively voted on. People unhappy with specific programs would mobilize public opinion to defund that program, not cut tax revenue altogether while increasing funds to preferred programs (what we’ve seen in recent years)…it’s done nothing but undermine democracy (by confusing the public) and add to the national debt.

      Daniel Habtemariam

      • No, I don’t think it is related much to progressive income taxation, except in the fact that wealthy people would probably end up paying more on average than they currently do (I honestly don’t know – it’s an empirical question). From the perspective of this framework that I’m suggesting, the wealthy – generally speaking – have probably been paying less than their proportional share of the total value derived in the provision of property rights for some time.

        Governments (countries) have good reasons not to implement policies (tax and otherwise) that would “scare” away people with wealth since the flight of capital has the potential to decrease a country’s influence on the world stage. Since wealthy people are more able to move around from country to country, whereas their less wealthy counterparts are not, historically speaking governments have found themselves in a position where they have near-monopolistic power to place a disproportionate tax burden on those for whom moving to another country is too difficult/costly (e.g. as a proportion of their total wealth resources they cannot afford to do it, never mind the sociological/emotional costs associated with isolation from your cultural/social group that such a move often entails).

        Returning to the point regarding progressive taxation, there might actually even be legitimate reasons to consider having a wealth tax rate that decreases slightly as a function of overall wealth – a kind of economies of scale argument (e.g. if government can provide property rights cheaper per unit – whatever that means – in larger quantities). For practical reasons, it would probably be most sensible to just levy a flat rate on all net wealth. Allowing the possibility of rates that vary opens a can of worms that is not likely merited by any slight improvement in equity; more complicated policies are more difficult for the populace to monitor, more susceptible to political manipulation). The idea, though, is that a benefit is received in the provision of property rights; and that benefit is not costless. Wealthy people benefit economically in absolute dollar terms from this to a degree greater (in particular, in a manner proportional to the difference in their respective net wealths) than their less wealthy counterparts and consequently should be assessed (and be willing to pay) accordingly.

        Regarding paying for the highway/transportation systems, that should be done (I believe) via fuel taxation, since that pegs the cost to benefit derived. Bill Gates would naturally pay more (overall, when adding up all the transportation costs associated with running his business), although it would be done in an implicit manner, each time one of his vehicles fills up at the pump. This is ideal in the sense that it is less painful than having an accounting once a year. Ideally, the tax on wealth would be paid in a manner similar (since the timing/nature of the benefit is somewhat similar) to the ways that (e.g. auto) insurance policies are paid for: monthly, quarterly, etc. by choice.

        Regarding property taxes as they currently stand (e.g. mostly at the state and municipal levels), it seems to verge on obscene to me (from the perspective, again, of the “benefits” approach to taxation that I’m suggesting in all this) that homeowners pay taxes on property that they actually don’t own – namely the entire value of the house they live in even though much of it is owned by (and reverts to, in case of financial hardship and default) those who own the banks and other institutions that have extended the loans. Here again, the different parties with ownership in any given piece of real estate receive benefits in that ownership (through the public provision of property rights) in proportion to their various ownership stakes in that property and consequently the taxes implemented to pay for the provision of those benefits should accrue in a manner that is proportional to the benefits that each of these parties receives in their respective “rights to own”.

        Also, this framework for taxation that I’m suggesting (correctly, I believe) makes no distinction between inherited or uninherited wealth. The benefits attaching to ownership of property don’t change depending on where the wealth comes from (as long as it is gained via acceptable/legal means). Treating inherited wealth differently from so-called “earned” wealth erodes the very foundations of property rights that our system (and the greater levels of prosperity that I believe it can produce) is based on. I would be very much against anything of that sort.

        Note that this framework for taxation would do away, completely, with corporate taxation as we currently know it since the primary benefit (property rights) attaches to individuals, not corporations. Ultimately all wealth is owned by individuals; so each year, very much like an insurance policy payment, individuals would pay some fixed percent of their net wealths to cover the general expenditures of government (i.e. costs associated with producing the system that provides the property rights that are of such great economic value to us). Democratic processes determine what the sum of those expenditures are, but our share of those expenditures should be firmly based in individual economic rights and reflect benefit derived rather than the (potentially capricious) whims of the masses (e.g. democracy doesn’t necessarily solve many of the problems of the human condition: minorities – the “wealthy” included – can suffer at the hands of the crowd under democratic forms of government; just look at Venezuela for an example of that).

        Also, this form of taxation is just to pay for the general operations of (Federal) government. Specific programs should be financed as appropriate. E.g. social security is an insurance benefit that is proportional (for the most part) to income; consequently, it makes a lot of sense to finance that program (if we decide we want such a program – and it appears that we have) via a payroll tax – a tax proportional to our respective income levels.

        Lastly, what this approach to taxation does that I feel is so important is that it provides a real framework for identifying tax obligations that are not arbitrary (i.e. not just the outcome of a political process), but rather are based on a reasonable principle (that obligations should reflect how we benefit from government). It highlights the fact that, just as we have civil rights, we also have economic rights that government policies should respect and reflect. I’ve attached a couple of email conversations I’ve had in the past on this subject that some may find interesting.

        • On a more economic note, I am interested in the idea of replacing the annual income tax with a net wealth tax. I believe that a net wealth tax would more nearly approximate the legitimate economic claim that good government should have on its citizens than the current policy of taxing income does. Taxing net wealth (e.g. a fixed or perhaps even slightly decreasing pct to reflect decreasing marginal costs of production on the part of the government) reflects the principal economic benefit we derive from our form of government (individual property-rights) and allocates tax burdens across the population in a way that, unlike policies that tax income, more organcally reflect benefit derived. As a consequence, net wealth tax policies are more likely to respect individual property rights because the individual tax obligation is proportional to benefit derived rather than being the (potentially capricious) outcome of a democratic political process. Given the constraint of near-monopolistic power that governments presently tend to exert in tax matters, having a policy that reflects benefits derived is about as close as we can come to a competitive-pricing-type framework (one in which effective property rights are more balanced than under more monopolistic conditions).

          Much if not most of what the government does through the establishment of institutions and the implementation of policies has an impact on our property rights. In the very first place, the fact that we can own and gainfully use property is of great economic value. In addition, the value of our human capital is affected by policies related to the labor markets; and our abilities to gain and then use whatever skills, knowlege, etc. we can is in many ways influenced by government. Again, it seems rather clear that the primary economic product of government relates to property rights. Another way of saying this is that what we stand to lose (the net amount at risk, to use an insurance term) in the absence of our form of government is the loss of our property rights – our net wealth, broadly defined (e.g. to include physical capital, human capital, financial capital, etc.). At any given instant, like owning an insurance policy, we benefit in a degree proportional to this net amount at risk; and the price that we are required to pay for that benefit (our tax obligations) should reflect this fact. I should note here that I am talking about financing the general operations of government through a net wealth tax. Other programs might be financed differently where appropriate, and non-economic benefits, such as the portion of “protection of life, liberty” that is essentially non-economic in nature, should be paid for in kind – e.g. by required military service or the draft in times of war or jury duty, etc..

          One of the criticisms of taxing wealth is that it would represent a serious disincentive to save. There is of course some reason for concern on this point, but our concerns should be mitigated if not entirely eliminated by considering the fact that the current system, by providing disincentives for work (that’s what an income tax does) implicitly reduces savings already since savings are generated by unconsumed income. By removing the income tax, the theory predicts an increase in income, which translates (again in micro-theory) to increased savings. So, whereas some decrease in savings might be expected, it is far from clear to me without doing some simulation studies or other form of analysis that the decrease would be anytyging to worry about; and it’s even possible that the increase in income would more than compensate for the disincentive for saving.

          Perhaps of greater interest, however, is the fact that lower income individuals would likely be the ones that would (proportionally speaking) experience the greatest increase in savings, since they currently have a lower proportion of income that is disposable (hence susceptible to being saved/invested). From the perspective of this preliminary (and cursory) analysis we are justified in wondering whether income taxation effectively shifts the incentives and capacity for saving from the poor to the already wealthy relative to net wealth taxation; and if so, is it something that we’re comfortable with?

          If that were the only implication for the income versus net wealth tax policy comparison, it would be interesting enough I think; but it’s not. It turns out that income taxation by its very nature inherently represents a form of wealth transfer from wealthier individuals to poorer individuals within the same income class. It is a wealth transfer because one subclass is effectively subsidizing the other: two individuals with the exact same net income pay equal income taxes while the one with greater net wealth implicitly (and by no choice of his own) derives a greater benefit: the guarantee of a greater absolute dollar amount via government provision of individual property rights. This will have the effect of increasing the wealth of the already wealthy relative to their less wealthy counterparts and represents, among other things, a form of
          discrimination against those with risky income streams relative to those with less risky income streams. This is because, in theory at least, two individuals with equal incomes can only have different net wealths if the assets backing their income (comprising their net wealths) are of different risk levels. So, the wall street banker with little initial accumulated (physical, financial capital) wealth and risky human capital wealth is subsidizing the Heinz family children who inherited a relatively well-diversified fraction of an estate.

          Switching from an income tax to a net wealth tax would arguably result in increased incentives for investment in risky assets, potentially offsetting any expected reductions in entrepreneurial incentives associated with having to pay taxes even when net income is not positive (something that would likely be incorporated into capital budgeting without much fanfare).

          The above considerations are important because, again, not only do they highlight the injustice of the current income-tax policy (people are paying for services in a manner that is not proportional to the absolute dollar size of the benefit they receive), but it suggests the possibility that the injustice is opposite what most liberal-thinking people (i’m not necessarily one of these) think it should be. Interesting, no?

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