Tax wealth instead of income?

Here’s a practical policy idea that might serve the aims of the ‘Occupy’ movement: try to transition from income taxes to wealth taxes. Instead of limiting how much money people can make in a year – try to limit how enormous a fortune they can actually amass.

If you taxed people a percentage of their total wealth each year, it would massively raise the tax burdens for the richest individuals, without having a large effect on those who are just doing the basics of saving for retirement. Such a policy would punish the ‘idle rich’ who inherit some sort of windfall, and who live on it for the rest of their lives. Arguably, it would do less than income taxes to diminish the efforts of people whose efforts genuinely produce a lot of value. True entrepreneurs and innovators could pay a small wealth tax and keep coming out ahead; only those who are just sitting on a pile of money would see their assets shrinking substantially.

Steve Jobs may have produced spinoff benefits for the people who work at his company and use his products; Smaug the dragon did not, sitting alone on his massive pile of gold. (Though he also stole the gold, which may be a bigger strike against him than simply having it. He didn’t earn it though voluntary transactions that were to the benefit of both parties.)

Imagine you set a wealth tax of 0.1% per year. Someone who has saved $1,000,000 for retirement would pay $1,000 per year in tax on the wealth. Carlos Slim, who is currently the richest person in the world, would pay about $74 million per year in wealth tax – $1 million in tax for every $1 billion in the bank. You could also make the tax progressive: set the rate for the first $1,000,000 at 0.1% and set the rate for much higher levels of wealth at higher percentage values. Maybe Mr. Slim should pay 10% per year on that gigantic fortune. That would be $7.4 billion for the Mexican treasury, taken from a pile that is already far too large to be spent by a single person, except perhaps in the most lavish ways imaginable.

I am not sure if the policy is a good idea, but it is the sort of thing a movement could actually push, as opposed to just expressing a general ill-focused agenda in favour of redistribution of wealth. Taxing wealth might even be economically efficient, if it kept people from maintaining vast unproductive piles of wealth. It is quite likely to be efficient from a utilitarian standpoint. People who rely on government spending – in the form of food stamps, unemployment benefits, and the like – value those dollars far more than Mr. Slim does. For Mr. Slim, they might mean the difference between being able to buy 15% of some big company and being able to buy 16%. For the people dependent on government benefits, it might mean the difference between feeding their children well or badly.

One exception to the policy: people who perform a sufficiently great public service should earn a basic state pension for life, not subject to any taxes. To double down on Tolkien analogies – if you carry the One Ring to Mount Doom, you get to retire afterward without worrying about taxes.

I am curious to know what readers think about the idea.

Author: Milan

In the spring of 2005, I graduated from the University of British Columbia with a degree in International Relations and a general focus in the area of environmental politics. In the fall of 2005, I began reading for an M.Phil in IR at Wadham College, Oxford. Outside school, I am very interested in photography, writing, and the outdoors. I am writing this blog to keep in touch with friends and family around the world, provide a more personal view of graduate student life in Oxford, and pass on some lessons I've learned here.

37 thoughts on “Tax wealth instead of income?”

  1. A wealth tax is definitely something worth considering. This is currently being done in some countries through death taxes. To do so against the super-super-rich would require vast international agreement as the super-super-rich also have considerable international mobility. One of the challenges would be determining a person`s wealth, particularly in corupt countries where the accumulation of wealth is hidden or done through proxies.

    Are you familar with any country who currently imposes a wealth tax during someone`s life.

  2. One thing that would be unpopular about wealth taxes is that they would often force people to sell off valuable property to pay them. If most of your wealth is in the form of an expensive home or art collection, people might see it as unjust that you are forced to sell whatever percent per year to pay the tax.

    The demand to do so is morally equivalent to taking the same percent from someone’s bank accounts or stock holdings, but I think the public would see it as more of an injustice to be forced to sell something like art or part of a person’s home.

  3. I think as it becomes more and more difficult to earn a good return on investment, something like a wealth tax becomes more and more of a good idea.

    If the economy really is in a growth period, you might think that the system of free investment does an efficient job of pushing capital to where it can be best used. But when you are in hoarding period, even inefficient government programs create more efficient capital flows than the alternative (people sitting on money). As it becomes more and more difficult to extract a compound surplus from the earth, something like a wealth tax becomes a better and better idea.

  4. As for the Art collection – there would be a simple solution: give your art collection to a not for profit foundation. This would also work for properties which the ultra rich own and do not want to keep as investments, but want to keep having access to – they can be given to foundations which can operate them for the benefit of the public at large, and since they are no longer owned by the ultra rich, no longer subject to wealth tax.

    However, this is all mute if the wealth tax is set at 0.1% – even if you had nothing to finance the taxes on your art collection, you would only have to sell of 0.1% of it every year, which in your whole lifetime would not add up to 10% of the collection.

  5. Inflation is already a 3% per year loss equivalent to a wealth tax.

    Central banks increased inflation by keeping interest rates low in response to the crisis.

    It seems pretty fair to impose a small new similar tax, so that essential services can be maintained, and charge that tax to the people who benefitted from the bank bailouts – everybody with wealth.

  6. Inflation is not a tax on wealth because it only taxes cash. If you can hold a commodity that rises at the rate of inflation, you are protected, and yet you are providing no benefit to the economy at all. Wealth taxes would be like inflation for assets.

  7. I think that a tax for the extremely affluent is a great idea, but how would you collect the information to ascertain a person’s worth? There are many ways to hide your money. I think it would be easier to increase taxes upon a person’s death.

  8. I do not think there are many more ways to hide wealth than to hide income. And, it can be made just as illegal to hide wealth as to hide income.

    People are already forced to admit to the state their wealth all the time. Like, if you apply for a student loan, you must say what assets you have, and this impacts the amount of loan you will be given.

  9. Tapping in with the carrot instead of the stick.

    Bill and Melinda Gates and Warren Buffet are examples of extremely wealthy people who have been extremely generous with their weatlh. The Melinda and Bill Gatees Foundation is the result. The primary aims of the foundation are, globally, to enhance healthcare and reduce extreme poverty, and in America, to expand educational opportunities and access to information technology.

    The endowment currently stands at over $30 billion dollars and gives away $1.5 billion annually.

    I can also understand their interest in directing how the money is spent. Much of the Foundation’s spending is in Africa, where unfortunately corruption and accumulation of wealth among the few is common.

  10. One exception to the policy: people who perform a sufficiently great public service should earn a basic state pension for life, not subject to any taxes. Unless you have somehow found an utterly unbribeable, unthreatenable, and objective judge (is there one even in Tolkein?) then this is a very bad idea. Within a few years almost every single very wealthy person, dragon or no, would quickly be deemed equivalent to a ring-carrier.

  11. Sarah,

    I was thinking it would be a relatively small stipend – enough to live on, but not enough to tempt those who are already wealthy.

    It’s true that there is a risk that all such awards might be misused and granted to the undeserving but politically well connected.

  12. Tristan,

    As endlessly discussed before, buying commodities does not magically protect you from inflation. There is no guarantee that any commodity will be worth the same amount or more than it is now at any point in the future.

    Practically speaking, there is a strong case to be made that high commodity prices recently have largely been the result of very rapid economic growth in China. If the pace of that growth slows, the bull market in commodities could end with it.

  13. Smaug would not favour wealth taxes:

    Dragons may not have much real use for all their wealth, but they know it to an ounce as a rule, especially after long possession; and Smaug was no exception…

    [Smaug] stirred and stretched forth his neck to sniff. Then he missed the cup [that Bilbo had stolen]!

    Thieves! Fire! Murder! Such a thing had not happened since first he came to the Mountain! His rage passes description – the sort of rage that is only seen when rich folk that have more than they can enjoy suddenly lose something that they have long had but have never before used or wanted.

    The Hobbit is well populated with clever descriptions and interesting bits of social commentary. There is a lot in it that is explicitly concerned with ethics and psychology.

  14. Milan,

    I didn’t invoke anything magical. I simply said something trivially, tautologically true: “If you can hold a commodity that rises at the rate of inflation, you are protected”

    You might complain, and say that commodities are not a special class of investments, so my expression should have read: “If you can hold an investment that rises at the rate of inflation, you are protected”

    But the difference is, an investment creates wealth by directing capital to a location where a surplus can be extracted. Investing in commodities does not contribute to the production of a surplus, it does not increase the efficiency of the market.

    If you think it’s impossible to hold commodities in such a way that you are hedged against inflation, you are taking the minority view. It’s nothing magical about commodities that ensures that people, on average, will be willing to pay the same relative cost as they are today – it’s simply the assumption of the status quo remaining the same. And things remaining the same isn’t an accident, nearly everything the state does is done in order to keep things the same, to keep the status quo intact.

  15. I think it is totally unjustified to assume that commodities have special characteristics as an asset class that make them more likely than other assets to rise in value at a rate that outpaces inflation.

    The price of gold has increased a lot lately, sure. But the long-term data on the quality of commodities as an investment does not support the view that they provide better protection against inflation than stocks, bonds, or other asset types. Of course, future trends in asset prices may differ. I am just saying that there is no logical or empirical basis for thinking that commodities are especially good as an inflation hedge.

  16. A 5-point tax plan that even an ‘occupier’ could love

    Last updated Monday, Dec. 05, 2011 10:03AM EST

    Believe it or not, there is such a thing as a good tax.

    A good tax raises the required government revenue by not only treating equals equally, but also by requiring more from those who will be hurt the least.

    However, that is not all: a good tax is also a tax that is administered simply, transparently, and in a “neutral” way.

  17. A wealth tax is akin to an income tax that is based on potential income. That is, let’s say you have a bachelor’s degree in science, and you work as a chemist at a paint manufacturer making $30k, but the IRS taxes you on $60k because you(or others with similar qualifications) could be working as a research scientist at Merck or Pfizer making that much. A wealth tax leaves many people who are house rich and cash poor with no alternative but to sell in order to pay the tax, and in many instances, that coercion to sell results in them losing potential gains in wealth and force them to make undesirable changes.

    Let me illustrate with an example from another country, the case of a gentleman on a fixed pension, periodically revised for inflation(and we know they never keep up with actual inflation in the cost of living, particularly in urbania). For the sake of simplicity, I will put the figures in dollars. The gentleman’s pension was initially on the order of $150 a month. Prior to retirement, he had sunk all his savings and gains from other investments into a house purchased for approximately $20,000. Over the course of 20 years, due to inflation and the rise in the relative value of the currency against the USD(and you will know which currency in a moment), his pension was revised to approximately $400 a month, which is sufficient to pay for food and utilities, but not enough to save for medical emergencies as will happen with the elderly, and certainly not enough to rent the home he lives in.

    In the meanwhile, the city in which he had bought a home boomed due to IT and back-office outsourcing(now you will know which country and city this story is located in), and the value of his home jumped from year to year. This country has a wealth tax of 1% a year, which meant that as soon as the property exceed $100,000 in value(at which time his pension was approximately $3000/year), it handily outstripped his pension’s ability to pay the tax. The purpose of buying his home was to live out the rest of his life there, and the location was chosen for access to decent health care and certain other factors that gave the city the sobriquet of “pensioners’ paradise”. Factors beyond his control led to a tax demand way beyond his ability to pay, and would have forced him to abandon his chosen retirement dwelling, and seek to move somewhere else less suitable.

    The home currently has a market value of between $500k and $600k, with a consequent wealth tax assessment that goes beyond his entire pension income. Of course, if he had sold when the value of the home hit $100k(about 10 years ago) and his pension could no longer support the tax demand, he would have lost out on the best part of the property’s appreciation. Taxes should be based on two things: actual income, and for services provided. A wealth tax is like the electric utility charging you a minimum monthly bill based on the size of your home, or the water utility doing the same assuming usage for a swimming pool because your neighbor has one. When an asset is sold or exchanged, it is subject to a capital gains tax, which is a sufficient tax on its own. A wealth tax, under certain circumstances, could very well have the effect of more than doubling your capital gains tax. It is a capital gains tax assessed on unrealized capital gains. At its worst, it discriminates hugely against those of lesser means.

  18. In Canada, real property taxes on real property (land and buildings) are a form of a wealth tax. It is generally accepted. It is relatively easy to determine and administer. I expect that big reason for its acceptance is that real property cannot be moved. Also I expect that people accept the property tax as part of the cost of living in that particular location.

    Other forms of wealth are more portable. People with it will move it to where there are lower taxes.

    Many people are also quite proud of their citizenship. I wonder if that pride of citizenship could be converted into the citizens of a country being willing to accept a wealth tax as part of their citizneship.

    In Canada as the boomer generation is retiring with its acculmulated wealth, I wonder if it would be prepared to share some of that wealth in return for the pride in citizenship and in recognition that it will be drawing more on the health system.

    I do not know if I would be willing to do this voluntarily . But if it was forced upon me by a wealth tax, I expect that I would accept that as part of the cost of living in Canada.

  19. Taxing land and property is one of the most efficient and least distorting ways for governments to raise money

  20. The disparity of wealth in the US is probably the largest in the world now. Income is not taxed at the progressive rates contemplated at the time the income tax was first instituted in this country.

    Local governments across much, if not all, of the U.S, taxes the real property of citizens living there. Because this tax, when coupoled with inflation, was taxing many of the elderly out of the homes they had purchased in tbeir best earning years, some states passed laws , in California the people passed a resolution, limiting the percentage of increase each year, not permitting mere inflation to raise the base for property taxes. This has saved many seniors from losing their homes because of inability to pay a wealth tax. My wife and I appreciate that. The limitation has had a, hopefully unintended, effect., limiting the property wealth tax for corporations to an extent greater than for human beneficiaries who, not living as long as corporations, do not benefit as much.
    Property records at local county recorders discloses ownership of wealth held in the form of land. Records of brokers and banks, and the SEC have records of ownership of and sales of wealth held in the form of securities. These,with self reporting requirements analogous to tbose used for income would make hiding of wealth more difficult. In addition many countries preclude moving large sums out ot those countries and such a law coupled with penalty laws, monetary and other, against failure to report and/or active evasion would keep most reports honest.
    Exclusions could be formulated for wealth increments due to acts by the holder, including spouses thereof, e.g. Steve Jobs, Gates, and their splendid types who created whole industries for the peoples of this country while imposing strict taxation on the holders of wealth accumulated by ancestors dead a generation or more, eg. Morgans, Rockefellers.
    Such changes in taxation methods may not be easy but seem fair, possible, and reasonable to me. The wealthy and the 90% all have 100 percent of their wealth and their lives protected by the entire power of the state. We do not ask that anyone pay all that they can, only what is fair.
    In the interim:

  21. In the meanwhile, why not reduce the unfairness of the current tax code? Currently income from wages is taxed more than capital gains and than interest. In other words, income derived from wealth held in the form of securities or governmental bonds is somehow more blessed, and therefore not as taxable, as income from jobs. Check it out.

  22. From this history, Mr Piketty derives a grand theory of capital and inequality. As a general rule wealth grows faster than economic output, he explains, a concept he captures in the expression r > g (where r is the rate of return to wealth and g is the economic growth rate). Other things being equal, faster economic growth will diminish the importance of wealth in a society, whereas slower growth will increase it (and demographic change that slows global growth will make capital more dominant). But there are no natural forces pushing against the steady concentration of wealth. Only a burst of rapid growth (from technological progress or rising population) or government intervention can be counted on to keep economies from returning to the “patrimonial capitalism” that worried Karl Marx. Mr Piketty closes the book by recommending that governments step in now, by adopting a global tax on wealth, to prevent soaring inequality contributing to economic or political instability down the road.

  23. DAVOS, Switzerland — Politicians and business leaders gathering in the Swiss Alps this week face an increasingly divided world, with the poor falling further behind the super-rich and political fissures in the United States, Europe and the Middle East running deeper than at any time in decades.

    Just 62 people, 53 of them men, own as much wealth as the poorest half of the entire world population, 3.5 billion people, compared with 388 individuals five years earlier.

    The richest 1 per cent own more than the other 99 per cent put together, anti-poverty charity Oxfam said on Monday.

  24. Piketty: the poorest half of Americans saw a “total collapse” in their share of the country’s wealth

    In a new analysis of the World Income Database published by the National Bureau of Economic Research, Thomas Piketty and colleagues from the Paris School of Economics and UC Berkeley, describe a “collapse” of the share of US national wealth claimed by the bottom 50% of the country — down to 12% from 20% in 1978 — along with an (unsurprising) drop in income for the poorest half of America.

    The authors contrast this situation with the UK, France and China, and find that income inequality is much less stark in other countries — in France, the poorest 50% saw income growth of 39% over the same period (even though France also became more unequal over that time).

  25. “Jean-Baptiste Colbert, the finance minister of Louis XIV of France, famously compared the art of raising tax to “plucking the goose so as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”. Tax systems vary from one economy to another—Europe imposes value-added taxes, America does not. Yet in most countries three flaws show how the art of plucking has failed.

    One is missed opportunities. Expensive housing, often the result of a shortage of land, has yielded windfall gains to homeowners in big, global cities. House prices there are 34% higher, on average, than five years ago, freezing young people out of home ownership (see article). Windfall gains should be an obvious source of revenue, yet property taxes have stayed roughly constant at 6% of government revenues in rich countries, the same as before the boom.

    Fundamental tax reform can boost growth and make societies fairer—whatever the share of GDP a government takes in tax. Fortunately, the principles according to which rich countries can design a good system are clear: taxes should target rents, preserve incentives and be hard to avoid.

    All countries should tax both property and inheritance more. These taxes are unpopular but mostly efficient. In a world where property ownership brings windfalls that persist across generations, such taxes are desirable. A conservative first step would be to roll back recent cuts to inheritance tax. A more radical approach would be to introduce a land-value tax, the most efficient of all property taxes and one with a long liberal heritage (see Briefing).”

  26. Experience would seem to be on the sceptics’ side. Net-wealth taxes do not have an encouraging record. In 1990, 12 rich countries levied them. By 2017 only four did: France, Switzerland, Spain and Norway. France has since mostly scrapped its levy, fearing that it made the country unfriendly to investors. Of the remainder, only Switzerland raises significant revenue (about 1% of gdp, comparable to what Mrs Warren hopes for). The Mirrlees review, a study of the British tax system in 2011, found that “wealth taxes have failed to live up to expectations and are generally in decline”. But the fact that many countries have abandoned net-wealth taxes is hardly a killer argument against them. What really matters is why they did so, and whether the problems they found with them would apply in America. There are three primary issues to consider: valuation, avoidance and economic impact.

    That adds to the second problem: avoidance. When Spain exempted small-business shares from its wealth tax in 1994, for example, business owners reorganised their affairs to exploit the exemption, according to work by Mr Saez and Facundo Alvaredo of the Paris School of Economics. The most lucrative avoidance involves borrowing money and using it to buy non-taxable assets, thereby reducing taxable net worth. Many countries with wealth taxes added rules to exclude debts incurred buying exempt assets.

  27. Setting a value

    The article on “Rich people’s problems” in The World If supplement (July 6th) asserted that the “trickier parts of investment portfolios to value include…art and antiques, and…privately held businesses”. No, it’s easy.

    For any asset that does not have a value in an arm’s length market, the owner should be free to declare any value and pay tax based on that valuation. However, such a valuation should be deemed to imply willingness to sell the asset at that price to anyone, including the state Treasury. Any asset that is concealed from the tax authorities, if and when it comes to light, should be deemed to be valued at zero and available for purchase at that value by the Treasury.

    Avinash Dixit
    Emeritus professor of economics
    Princeton University
    Princeton, New Jersey

  28. Joseph Stiglitz: tax high earners at 70% to tackle widening inequality | The super-rich | The Guardian

    Stiglitz said that while an increase in the top rate on income would help lead to a more equal society, introducing wealth taxes on the fortunes accumulated by the world’s wealthiest over many generations would have an even bigger impact.

    “We should be taxing wealth at a higher rate, because much of the wealth is inherited wealth, [for example] – the young Walmarts, inherited their wealth,” he said.

    “One of my friends describes [this] as winning the sperm lottery – they chose the right parents. I think we have to realise that most of the billionaires have gotten much of their wealth out of luck.”

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