This is what I am thinking now. I could be wrong. Always interested in those with more expertise weighing in.
1. Wealth taxes are a true revolution. I don’t like income taxes as a method of raising revenue for the government. First, income taxes are completely insufficient to address inequality. Second, income tax is a hidden but regressive wealth tax. And third, income taxes provide bad incentives around work; wealth taxes do not.
2. WEALTH INEQUALITY
If you are extremely wealthy it is difficult to not make a lot of money each year. If you are poor it is difficult to ever become wealthy. I won’t go into all the reasons for those two facts, but it is a clear feature of the present economic system. It is worse than a lack of class mobility, though that is a big part of the problem. Wealth Inequality tends, as things are presently structured, to feed on itself. Not only do people get stuck in their ‘classes,’ the classes get further and further apart.
3. The simplest solution to wealth inequality is to move some wealth from the very wealthy and put it in the hands of the not so wealthy. Using wealthy people’s excess money to pay for things poorer people need to have a chance to not be poor is the obvious solution to wealth inequality. It will increase upward mobility and it will decrease the runaway wealth at the top.
4.“Wealth Inequality” and not “Income Inequality.” Income inequality is a symptom of wealth inequality. Wealth inequality is the real problem. If everyone were sitting on a million dollars, it would be relatively unimportant that some people were earning 1000 times more than others. The real problem is that many Americans have zero wealth or zero wealth beyond their next paycheck while others have enough wealth to run a small country.
5. STEALTH WEALTH TAX
When you start thinking about inequality in this way, you can see that there is already a stealth wealth tax in our tax code.
I have a friend who spent the better part of his adult life as a struggling actor, accruing debt while working odd jobs working in the expensive city of Los Angeles. Finally, he booked a big gig. He got paid very well and moved into the top tax bracket. The next year, he didn’t have that gig and went back to his normal income. So for one year he made a good amount of money. He was able to use that money to pay off some debts accrued over the years of struggling. But, of course, he also had to pay a chunk of that money in taxes.
6. This is not a sob story (though you might not be surprised how quickly he started sounding like a Republican on taxes). In a world where income taxes are how we raise revenue, he probably paid a fair amount. But consider the following. Say, my friend made $500k in a year. Now say that same year a billionaire made $500K in salary as well. They pay the same in income taxes. The billionaire has no need now or in the future for any portion of that $500k. My friend on the other had an immediate and future need. He had debts. He had no savings. He had no retirement. This one year salary was his entire wealth. And it could be what he’d live on for the near future. Or it could constitute the beginning of his savings.
7. The fact that they were taxed the same amount shows a near complete blindness to the circumstances generating the income. And it results in a situation where many of us pay the equivalent of wealth taxes. Those of us whose accumulated wealth is almost entirely equivalent to our present salary are, in essence, having their wealth taxed. The income tax becomes a wealth tax for the poor and middle class. It is wrong that the poor and middle class should be levied a wealth tax but the rich should not.
8. Wealth accumulation gives us opportunities that pure income does not. Savings, retirement, and house ownership are important sources of well-being. They provide a safety net that allows peace of mind and the ability to take greater chances, pursue one’s dreams, or retire on your own timetable. My friend’s entire wealth was taxed and some of it at 39% the highest rate for income taxes. Now imagine the uproar if we taxed billionaires at 39% of their wealth.
9. DIMINISHING UTILITY OF MONEY
The arguments for a progressive tax rate are simple. Dollars don’t have the same value for all of us. If you are begging on the street, a dollar means one thing. If you are a billionaire, it means another. This is because of the diminishing value of money as you get wealthier. When we ask people to chip in, it’s not as important to measure the amount they are chipping in so much as what that amount means to them. To determine how much a person should pay we need to know how much value a dollar has to them (or should have to them). Dollars that a person needs to eat, get shelter, have basic healthcare etc… are much more valuable than dollars someone needs to buy a yacht. And there is a fair amount of scientific evidence supporting the obviousness of this conclusion. And this is why the seeming fairness of a flat tax is irredeemably unfair. (A complimentary argument is that people should pay more for a system if they benefit more from that system — but leave that for another time).
10. INCOME TAX BRACKETS ARE UNFAIR
We are now discussing an unfairness in the tax code not often talked about. We understand the unfairness in the seeming fairness of a flat tax. But we miss the unfairness inherent in the way we determine tax brackets. This unfairness is due to the income tax being a single year snapshot of your present income. But the value of a dollar to you is not determined by your income. It is determined by your wealth. And so a system that decides on your tax bracket by looking at your income will be inherently unfair.
11. It’s not that this isn’t clear to a lot of people. There’s a reason that we keep lowering taxes for the middle class and below. It’s not just that it plays well politically. It’s that it is the only thing people can think of when presented with the obvious unfairness of the present system, especially, with Republicans stymieing any chance for raising income taxes on the wealthy.
11. INCOME TAX VS. WEALTH TAX AND WEALTH INEQUALITY
But even if we did cut taxes for the vast majority and raise income taxes on the wealthy, it would not be sufficient to fix the vast wealth inequality. Wealth Inequality has developed over decades. Single year incomes are blind to that history. AOC suggested a 70% tax for income in a new bracket. The bracket would be for earnings over $10 million. We are talking about a very small number people, as few as 16,000 filers. MONEY estimated it could raise maybe 72 billion a year before people figured out how to avoid it. That is not nothing but it is not going to fix income inequality. That is roughly what the US pays on food stamps every year. Doubling that amount would not have a huge effect on wealth inequality. You could tax the wealthiest at 99% and it would still be a long haul to dealing with the long history of wealth accumulation. It would also be politically infeasible.
13. Fortunately, there is a better way. Elizabeth Warren has proposed a wealth tax that would raise $270 billion a year. It is simple and, in an important political and moral sense, low.
Warren Plan
WEALTH TAX
$50 million 2%
$1 Billion 3%
REVENUE: $2.7 trillion over ten years
I want to emphasize how little an imposition this is. For someone with $60 million dollars in wealth, they would pay $200,000 in tax. If they had net zero income and expenses that would take fifty years to even get them down to the $50 million threshold. But, of course, it is not difficult to make $200K a year if you have $60 million. A certificate of deposit of 2% on just 10 million would cover all your wealth taxes with no work required.
The example others have used is Jeff Bezos who would pay about $4.1 billion a year according to Warren’s plan. Bezos salary each year is $1.6 million and let’s say he would pay roughly 40% of that (it’s less) each year or $640K. 40 % of income sounds like a lot, but not if you measure his wealth. His wealth is increasing much faster than his income. As an example, his net worth from January to May last year increased $33 billion. So are we really worried about Bezos paying $4 billion of that in taxes each year? A wealth tax is a much fairer way of evaluating what a dollar means to an individual.
Taking 2% of a person’s wealth does not substantially change their economic situation. This is true even if you have only $100. It is even truer for wealth ever $50 million.
14. Ultimately, I think Warren’s plan is too cautious. I think eventually, if possible, we should replace a large portion of the income tax system with a wealth tax system. But even in the shorter run we could be more aggressive and include a greater number of filers. A 1% tax on wealth over $8 million on it’s own could raise 300 billion a year. If we marry that with Warren’s plan (so adding 3% for over $50 million and 4% for billionaires), we roughly double how much revenue we could raise and we are looking at over $5.5 trillion over 10 years. That is a significant amount of money that we can raise without causing anyone hardship. (It’s roughly the cost of Bernie’s single-payer plan, for instance).
RESPONSIBLE PLAN
WEALTH TAX
$8 million 1%
$50 million 3%
$1 billion 4%
REVENUE $5.7 trillion over ten years
15. Wealth Taxes vs Income Taxes and the Economy
The argument against high income taxes is that they discourage work and investment and, therefore, harm the economy. Most economists seem to think getting much above 50-55% of income starts to have bad effects on the economy. There is no doubt that taxing a job’s income means one gets less of a reward for doing that job. Whether that has a larger effect on the economy or not, I think there is a bigger problem.
The wealthy avoid income taxes; one way they do this is by shedding income in favor of wealth accumulation. Bezos’ wealth is accumulating at the rate of tens of billions a year. His income is minuscule in comparison. The wealthy do this (to simplify) by stashing their wealth in stock investments, bonds, real estate etc.... By accumulating wealth rather than earning income, they avoid income taxes.
16. The GOP often argues that these wealth accumulation moves are the drivers of the economy. “What would happened if the wealthy stopped investing in things?” they ask, horrified. The fact is that the economy is much more driven by the spending of the masses. If the masses have money to spend, someone (even one of the masses!) will give them something to spend it on. For this reason, it is well-established that the best economic stimulus is putting money in the pockets of the poor and middle class. So removing some of the money the wealthy use to invest in things and giving it the poor and middle class is generally a net gain for the economy.
17. What effects on the economy would a wealth tax have?
Good ones! First, the wealth tax would take money out of low stimulus wealth accumulation activities like holding land and put it in the hands of the high stimulus poor and middle class. How does Bezos holding, say, a $500 million dollar ranch in Wyoming help the American economy? It does little to nothing (nothing if not for property taxes which are a form of wealth tax). But $500 million spread out to the poor will be immediately spent on food, housing, health care etc….
Second, wealth taxes do not disincentivize work. Your work income tax isn’t affected by a wealth tax (except tangentially and in the long run). For some it might even incentivize work. If you see your vast wealth slowly decreasing, maybe it will motivate you to get out there and try to make some more money.
Third, wealth taxes can incentivize more aggressive investments. If you are getting taxed on your wealth at 3%, a 3% return on your wealth doesn’t have nearly the same appeal as it did before. So a wealth tax is likely to increase investment in start-ups etc…. The wealthy are accustomed to effortless and steady accumulation of wealth. A wealth tax incentivizes more risk-taking. That means a more vibrant and entrepreneurial economy.
Fourth, for similar reasons, it might encourage greater spending by the wealthy. One response to disincentivizing wealth accumulation is to spend more. For the average citizen, encouraging saving is beneficial because it encourages wealth accumulation by those who don’t have it. But greater spending by the extremely wealthy would tend to stimulate the economy by transferring wealth downward.
(ONE CON: people will always try to find ways around a tax. If you pass a wealth tax, you have to also institute policies that discourage capital flight. If you are an American and you put your wealth in the Caymans, it should not be exempt from the wealth tax. If you decide to renounce your citizenship to avoid a wealth tax, you should pay an exit fee. Etc….)
18. GREAT FOR THE ECONOMY
What this suggests is that not only is a wealth tax a fairer tax, a tax that will help adjust a deeply imbalanced and unjust system, but it could also be great for the economy.