Monthly Archives: October 2011

The so-called ‘Buffett tax’ on high incomes is fine as far as it goes. But it’s not enough either to reverse the growing wealth stratification in this country, nor to repair the budget deficit. So here’s a suggestion for another small piece of the puzzle: The United States needs a small, graduated, national wealth tax. Properly implemented, a gentle national wealth tax raises some money at minimal distortion to the economy. Experience abroad suggests that so long as the tax is not too large, fears of capital flight are much exaggerated.

Yes, what I’m suggesting here is that we follow the lead of socialist trailblazers like Switzerland.

There are a lot of arguments for a small and graduated wealth tax: it raises (some) money, it does so at cost to the people who can best afford it, it provides a (small) counterweight to the increasing wealth inequality we are experiencing, and empirical evidence suggests that it will not materially hurt incentives or the economy.

Indeed, the US has a long history of wealth taxes. We have the federal estate tax, but that tax is now limited to the very wealthy, and is also subject to serious gamesmanship by savvy estate planners.

At the local level there is the property tax. The difference between a general wealth tax and a property tax is that a more general wealth tax taxes intangible interests such as stocks and bonds (and perhaps also cash), thus partly redressing current discrimination against those, like farmers, who choose to invest in real estate rather than Wall Street. Yes, there are valuation issues with complex financial instruments. That’s why we have tax lawyers.

The US also has some experience with local wealth taxes. When I moved here, Florida had an intangibles tax that only affected people with substantial non-cash financial assets held outside of a retirement fund. Jeb Bush got rid of that, presumably on the theory that it was a tax only rich people paid and thus bad.

The strongest arguments against wealth taxes that I know of are (1) that they are a form of double taxation, (2) they distort incentives in favor of consumption and against capital accumulation; and (3) that they encourage capital flight.

I’m personally not at all convinced by either of the first two arguments. Evidence suggests the third is not an issue so long as the wealth tax level is reasonably low, although it also seems clear that there is some number beyond which capital flight might become an issue. Note in this context that many foreign countries have wealth taxes, including hyper-capitalist Switzerland. Spain recently reinstated its wealth tax in a bid to fight its budget deficit.

The double taxation argument is that wealth is saved income. As the income was subject to tax when earned or inherited, it is wrong to tax it on a continuing basis when held. The problems with this argument are manifold. I’d argue that rates on unearned income, for example, have been inequitably low. Most importantly, though, I’d argue that even if it is double taxation it is justified by three policy considerations: (1) owners of great wealth disproportionately benefit from the maintenance of law and social order, and can fairly be asked to pay for it on a continuing basis, (2) we tax consumption (e.g. sales taxes), which is already double taxation, and a regressive tax at that, so why not tax savings which while it may be a double tax is at least progressive, (3) it is very mildly redistributional in the manner least painful to society in that it affects those least likely to feel it.

Almost any tax can be seen as an economic distortion. The trick is to pick those with the least effects. A large wealth tax is distortive, just as a large marginal income tax rate or a large almost-anything-other-than-sin tax is distortive. But sometimes a tax can level the playing field. Given that we already tax consumption via various forms of sales taxes (although we also give a partial credit for them on federal income taxes, so this is complicated), it is conceivable that taxing non-consumption is less of a distortion than it might otherwise be, as at the margin this tax on savings will encourage consumption. I wouldn’t put much weight on that, though, as I imagine a tax small enough not to have much of a noticeable effect.

I am not a tax lawyer, so I don’t have a detailed proposal to hand. I’d suggest that the tax should start small but be progressive, and might start with wealth over, say, $100,000, and might exempt all but the very most bloated tax-exempt retirement plans or annuities (say, the first $1 million in assets at least, maybe even more) on the grounds that we want to encourage retirement savings. I think one might also exempt home equity at least up to the 75th percentile, and maybe more, on the grounds that this is an illiquid asset, also serves as retirement savings, and is already taxed locally albeit erratically. On the other hand, there does need to be a limit on these exclusions, as there is no reason to make giant multi-million dollar mansions into a tax dodge any more than there is to allow the multi-million dollar overstuffed corporate pension plan to be one. Even so, by the time you have carved out a big chunk of home equity and 401k plans, anyone with $100,000 or more in liquid savings is either among the wealthy or about to put a kid through college. Note further that even without the exclusions I suggest above, about two-thirds of US families have less than $100,000 in wealth even including their car and home equity, so a tax of this sort really will only hit a very small fraction of the population. If you want to add an exception for the small family farm, and we can agree on a definition of what that is, we can throw that in too.

A wealth tax gentle enough not to be an economic distortion will probably need to max out, even at the very dizzyingly highest levels of wealth, at under 0.5% — say maybe 0.3% at the top. So it isn’t going to fix the deficit, or the Gini Coefficient, on its own. But every little bit helps.