Ashok Rao, a new blogger on the economics circuit, has a post up calling for a yearly wealth tax. This is an area economics has looked at rather extensively. The verdict, as far as I can tell, goes pretty strongly against such a tax.
Here are several arguments I find compelling against direct wealth taxation:
(1) Incentivizing individuals to shift consumption around in terms of time is inefficient; that is, a small wealth tax will create a large disincentive against saving and investment.
(2) Very little wealth is in liquid assets, and liquidation is costly.
(3) Wealth is probably easier to conceal than income, decreasing compliance or increasing enforcement costs.
(4) In the U.S., a constitutional amendment would be required.
(5) A national wealth tax of any size would create considerable global coordination problems.
Many economists favor moving in the opposite direction, such as towards a Hall-Rabushka consumption tax. Note, also, that the effective tax rate on wealth is already nonzero as a result of local property taxes, the capital gains tax, the estate tax, and the gift tax.
I definitely get the sense that most economists wouldn't support a capital tax (Miles Kimbal pointed me to his post, "Is Taxing Capital OK" @ http://blog.supplysideliberal.com/post/26413855704/is-taxing-capital-ok)
ReplyDeleteAs capital increasingly becomes the driver of national income, do the dynamics change any? I address (1) and (2) by suggesting that any immediate wealth tax be amortized over a longer-period of time, while exempting some constant N dollars adjusted to inflation.
This would give enough time for wealth in the form of home equity to be earned in liquid assets, greatly reducing the cost of liquidation. And by exempting the first N dollars, it is likely the households affected will have a relatively high marginal prop to save anyhow.
And while any nation would have coordination problems with this kind of policy, the one that has greatest international jurisdiction is the US, where it might be possible with the appropriate tax treaties (which are, granted, no easy thing).
Also, wouldn't capital gains duties be taxes on income from capital, not capital itself? With a real tax reform, we could remove all forms of income tax (including capital gains) which would partially offset the disincentive to invest.
A link to an interesting NRO article very critical of a wealth tax here, for those interested:
http://www.nationalreview.com/bench-memos/333660/constitutional-fiasco-wealth-tax-matthew-j-franck
A much longer discussion of this post here:
ReplyDeletehttp://ashokarao.com/2013/03/05/why-wealth-taxation-may-not-erode-capital-formation-and-why-its-good-for-immigration/
So what your saying is, if we taxed wealth - more wealth would become an underground thing that is guarded and hidden from the government. What is interesting is that we tax so many other things that don't get hidden from the government as a result or they are found by the government when hidden - why would wealth be different?
ReplyDeleteThere is a wealth tax, of sorts, already, the property tax. However, it is regressive as it applies the same percentage to all property, rather than progressive, with higher percentages charged to higher value property.
ReplyDelete