“your thoughts on replacing income and consumption taxes by a wealth tax?”

That is another reader request.  I would emphasize the following points:

1. A property tax already is a wealth tax.  This form of taxation works fine, although as much as possible value taxes on land should be replaced by taxes on the unimproved value of land, for the reasons suggested by Henry George.  California in particular should tax land more and income less.  Read Noah Smith on this.

2. The actual impact of capital gains taxes is complicated, but in practice they often act as wealth taxes, especially if they are not indexed for inflation.  The next time the Democrats hold all branches of government, they are likely to try to raise these tax rates to an excessive level.

3. The French try to tax wealth per se, and that is a big reason why so many French people have ended up in London.  People hate this, feeling they’ve already “given at the office.”  A higher and more progressive income or consumption tax, if needed, usually is better than a wealth tax.  The wealth tax hurts savings and investment to a disproportionate degree, plus it makes all property rights insecure.  You never know when your earnings are safe from further taxation.

4. Taxing wealth is another way of running a higher implicit government deficit, and this is dangerous.

So #1 aside, overall I am not crazy about wealth taxes.  Compare them to sovereign wealth funds.  You may or may not like SWFs, but at least the government is then trying to augment wealth rather than take away from it.


Bastiat: the law says you can't steal from your neighbor, so why can you elect a politician to do it?

Because nobody has figured out a better way to build a functioning society.

The American way is that you have to pay for the privilege of getting rich. Taxes don't seem to be much of a barrier to success; the amount of after tax wealth generated in the US is staggering. If you can't make it here, you probably can't make it anywhere.

"nobody has figured out a better way to build a functioning society"

That begs the question. If taxes are necessary, and I agree that they are, why not levy them fairly and equally? Also why use taxes to penalize some people or to try to control some actions.

If you have property taxes than tax property, all of it, no exceptions, no exemptions. Tax it fairly and equally. If you have income taxes then tax income, all income, everyone, no exceptions or exemptions.

Resist the urge to give in to lobbies for special interests and traditional rent seekers. Taxes would be lower for taxpayers if everyone was paying those taxes.

" Taxes would be lower for taxpayers if everyone was paying those taxes."

Lower for some and obviously higher for the others, the ones who weren't paying anything before and the ones paying very little. That's how progressive taxation works, in theory the more you earn the higher percentage you pay.

"Because nobody has figured out a better way to build a functioning society."

I don't think that anyone could make a credible case that taxes in developed countries today are the minimum absolutely necessary to maintain a functioning society. There's an analogy between taxes and war. One can concede the horrors and moral ambiguity of war without being a pacifist. Yet, even if one sees pacifism as flawed, one should still see war as a last resort. Similarly, one can concede the moral ambiguity of seizing private wealth under threat of criminal prosecution while still recognizing the need for taxation. Yet, even if one thinks taxes are necessary, one should still resort to taxation and government spending only as a last resort. Yet, while every President agrees that his or her hardest decision is to send a soldier to war, I have yet to hear any political leader say that his or her second hardest decision is to levy a dollar of tax or spend a government dollar.

People across the political spectrum agree that most government spending (which is what generates tax liabilities, now or in the future) would not pass the so-called "strict scrutiny" legal standard, i.e., the spending program either is not in pursuit of some *compelling* purpose or, if it is, could be more narrowly tailored to achieve that purpose. Instead, most spending meets only the so-called "rational basis" standard, i.e., one can conceive that there might be some hypothetical rationale for it, which may or may not be a good rationale. That's hardly constitutes necessary "to build a functioning society".

Is the difference between property taxes and SWFs somewhat semantic? Couldn't one conceive of property taxes as payments to a silent public partner? We could value the property claims of the tax collecting polity and treat the tax as a return on ownership. Is that much different than a SWF with real estate holdings?

If so, this has interesting implications for the SALT deduction. Trump is talking about leaving the deduction for property taxes. That is a way of encouraging such pseudo SWF’s.

A SWF owns property, but not all property properly belongs in a SWF. In fact, one could argue that the *only* property that belongs in a SWF is property for which no natural owner can be identified.

I think I understand your point now, which seems to be same as Tyler's reference to SWFs "augment[ing] wealth rather than tak[ing] away from it". Property taxes and SWFs are inverses. With a SWF, everyone's wealth is "augmented" beyond what they officially hold title to because the distributions from the SWF effectively give them a claim on the SWF. With property taxes, everyone's wealth is less than what they hold title to because the property taxes effectively give the government a claim on private property, i.e., property taxes "take away" wealth.

Could we replace property taxes "forever" by instead having all property owners contribute a portion of their property into a SWF or replace an SWF by distributing all property in the SWF immediately and levying property taxes from that point forward? Maybe, the credibility and time-consistency problems (unanticipated changes in tax rates and SWF distribution policies) between the two cases are different?

TC says: "The next time the Democrats hold all branches of government, they are likely to try to raise these tax rates to an excessive level." - what is this anti-Democratic Party rhetoric? As a matter of fact, raising taxes is exactly how to get the people to stop asking for so much government. When you borrow, as any spender knows, you over-consume. Did not behavioral economics get a nod from the Nobel committee this year?

The Republicans promote: "borrow and spend" (deficit spending) which gives people a false sense of how much government is actually spending. That's one reason today I voted for the Northern VA governor election by absentee ballot and voted against Fairfax county school bonds. Bonds = deferred taxes = bad (not to mention I think education is largely signaling, and kids don't need even more fancy school infrastructure. Let them lern like I did, reading under a lantern and scribblin' on a shovel, Abe Lincoln style. And I walked uphill both ways to skool!)

I grew up when Republicans were TAX and spend. Democrats were provide BENEFITS and tax. In Indiana in the 50s and 60s.

Something really had to be needed to overcome the requirement voters hike taxes. 13 school periods with classes running from 6:15am to 6:35pm to handle the baby boom plus the growth from the new GM supplier plants in town. Bond authority required voting to hike property taxes. Seems like the bond issue was rejected all the time. The new schools got built slowly.

But the 80s were when Republicans became opposed to all tax hikes, and in the 90s started demanding only tax cuts.

Free lunch economics.

Demanding only tax cuts has not resulted in Republicans demanding less war, less transportation, less educated workers, less trade.

sure there is less demand for war in the current republicans. transportation and trade don't seem to have much to do with taxes or tax cuts. you're probably right about education. I just think you've addressed the issue sensibly but have you really thought about this?

The "current Republicans" since 2008? That's a stretch, but I don't even buy it on its own terms. The lesser America isolationism Trump played to in the campaign has been married in practice to a reliance on the military as the sole tool of foreign policy. That seems likely to increase American entanglement abroad over time. I'll admit, the jury is out on that, but it's only been nine months and, when the only tool you have is a hammer, all the world looks like a nail. Let's come back to this when the Republicans actually propose a cut in military spending.

Ray you've got a point. Tax cuts have failed to reign in spending or starve the beast. Rather they've done the opposite. People will demand spending cuts only when they are taxed to pay for everything rather than borrow and spend.

Switzerland also has a moderate wealth tax (0.5% or so for the rich), but no capital gains tax for private individuals. There is also no national inheritance tax. This has a number of beneficial consequences:

- A capital gains tax punishes risk-taking: if you win, you pay a lot of taxes, if you lose, you don't get anything back. Given an investment opportunity with a 50% chance of gaining 40% and a 50% risk of losing 30%, the expected return without taxes is 5%. However, if there is a 25% capital gains tax, the expected return is reduced to 0%, as you only gain 30% in the good case. If there is an alternate investment that returns 1% for sure, you will choose the latter one in a country with capital gains taxes, but the risky one in a country without. Thus, capital gains taxes suppress meaning entrepreneurial risk-taking.

- Unlike Cowen implies, it is not so much the wealth tax that make the rich leave France. The inheritance tax has a much bigger impact. Almost no one leaves Switzerland to escape a wealth tax of 0.5% per year, but I am sure there would be plenty of rich leaving Switzerland or setting up elaborate trust structures if their inheritance was taxed by 30% or so. Because the inheritance tax is a one-time event, the immediate incentives to circumvent it are much higher. But a 0.5% tax on your wealth is often less than what the rich pay in management fees for their portfolios.

And one more advantage of a wealth tax: a wealth tax creates a much more steady income stream for the government, whereas capital gains taxes can be very volatile, depending on how well the stock market does in a given year. This allows the government to better plan its budget.

Also, there is a typo in my comment above. When I wrote "meaning" I meant "meaningful".


In Canada, we have both taxable capital gains and allowable capital losses: Any loss can be applied against a gain, resulting only in tax on the net gain of all investments. If you have a capital loss in a given year, and no capital gain, the loss can be held indefinitely for future use, or can be applied retroactively to the prior three taxation years against realized gains. That generally solves the issue you point out about risk vs. reward.

My concern with this is that it doesn't account for inflation -- you are taxed on the full gain over time, even though the asset value may have "increased" by inflation only. But that's a different issue.

Interesting. Can the losses only be applied against capital gains or also against other types of income? If an entrepreneur loses 100k with a failing business and goes back to work as an employee, can he deduct the capital losses from his work income?

A 0.50% annual wealth tax levied for 30 years is equivalent to a one-time 14% inheritance tax. (0.9950^30 = 1-0.14) Levied for 71 years, it's equivalent to a 30% inheritance tax. So, the 0.50% annual wealth tax may be less than the 30% inheritance tax depending on the "effective lifetime" of the wealth tax. (Obviously, wealth varies over time and not all of one's estate was saved over one's entire life.) However, a wealth tax levied over many decades is comparable in magnitude to the inheritance tax.

"1. A property tax already is a wealth tax."

I challenge that. Given the context, one refers here to a "real estate property tax". For example, the existing taxes on unimproved land or land with improvements (e.g., a residence).

Sure, these taxes exist and arguably they "work fine", but they are not a tax on "wealth" in any economic sense. No reduction is made for mortgage debt and tax is assessed even for properties on which liabilities exceed gross value. The tax more closely resembles a "use tax" than a "wealth tax".

In considering an actual wealth tax, one might consider the example of the Netherlands. Prior to 2001, the Netherlands had a wealth tax and also taxed income from investment, but not most capital gains. From 2001, the "wealth tax" as such was abolished along with the tax on actual investment income and replaced by what they call a "box three" tax. Under this regime, income tax on portfolio investment (e.g., interest and dividends, the latter generally from companies in which less than a 5 percent interest is held) is generally abolished in favor of a tax on the *net* value of certain investment assets (i.e., with deduction of liabilities) and a deemed return on investment of 4 percent is imposed on the balance. Initially, this was taxed at a flat rate of 30 percent and thus equivalent to a "wealth tax" of 1.2 percent in everything but name (One reason for misleading nomenclature was to prevent problems with tax relief under bilateral *income tax* treaties--in fact, the IRS issued a ruling, wrong on substance but perhaps correct on pragmatics, that the tax was an "income tax" for purposes of the US-Netherlands Treaty). As of 2017, this has been replaced by effective rates of 0.86%, 1.4% and 1.6% (rising according to wealth and therefore progressive). Deemed income (huurwaardeforfait) on a principal residence is taxed separately as ordinary income. Relatively low property tax is also assessed.

The advantages arguably include simplification in that the tax on actual returns and wealth tax were essentially collapsed into one tax. Second, the system only partially addresses the problem of tax deferral because someone like Warren Buffett, who owns more than 5 percent of BH), would be exempted on BH shares--instead he would be taxed on actual capital gains and dividends.

The system isn't without problems. First, the 4 percent rate was determined based on the prevailing interest rates at that time. Today, bank savers pay a deemed 4 percent return on actual returns of less than 1 percent on bank account balances. While the system probably generates more steady revenue for the government, it strikes me as having the opposite of a stimulative effect in recessionary and deflationary periods. That's an issue for economists, not me.

Also, focusing on the headline "your thoughts on replacing the income and consumption taxes by a wealth tax":

1. The system described above doesn't do that. It replaces only a part of the "income tax". The Netherlands has a general VAT rate of 21 percent and retains an income tax system, as well as a variety of other taxes. Experience shows that any attempt to introduce a wealth tax (or a consumption tax) would only supplement existing taxes. Simplification is hard! Particularly if one wants to retain perceived "fairness" ("fairness", like "reality" should always be placed in quotation marks--whose "fairness"?) and eliminate tax avoidance, etc.

2. The US is a special case with its federal constitutional system. With 51 taxing authorities (not counting counties and municipalities, etc), the idea of completely replacing anything by something else is easier said than done. I won't even go into the constitutional issues...

3. Having said that, the low-hanging fruit regarding simplicity and efficiency seems to me to be to eliminate the multiplicity of taxing systems, federal, state and local. I think we should look at federal revenue sharing on a per capita basis. There may be ways to legally nudge states into eliminating state income tax in return for a share of federal income tax revenue. If states want to impose additional taxes, they can do that through local consumption and property taxes. It resolves the very difficult issue of allocation of corporate revenue among various taxing authorites within the US which is currently a huge headache and costly endeavour. And, it would be more transparent and inherently progressive as regards federal spending among states.


So you are distinguishing between an asset tax and a wealth tax, where the latter is net of liabilities. I see how real estate taxes are the former. What about France's wealth tax? Is it really an asset tax? I know nothing about it.

I'll let the FT respond:


"3. The French try to tax wealth per se, and that is a big reason why so many French people have ended up in London. " For the average French person in London, I would say this is clearly not true. They ended up in London because... jobs.

The estate tax (an excise tax on the transfer of property at death) is a form of wealth tax, but with an exemption (about $11 million per couple) that makes the tax essentially a wealth tax (because only the wealthy pay it). The exemption was much smaller, but was increased in 2010 as part of the partial extension of the Bush tax cuts. Obama was criticized by members of his own party for the increase, but it was a political victory that wasn't apparent even to the Republicans at the time. How was it a political victory? By limiting the tax to people with wealth (more than $11 million in net assets) and exempting everyone else. Sure, Republicans continue to call it the death tax (which is technically untrue since the estate tax is part of a unified tax on the transfer of property either during life or at death) and try to scare people into believing it applies to the not wealthy, but with the large exemption it is a form of wealth tax. But like every form of tax (from ad valorem taxes to income taxes to sales taxes), it invites avoidance. That's what all taxes have in common. Well, almost all taxes. The exception is the payroll tax, which wealthy people like because they pay so little of it and it has lowered the income taxes they do pay (because the amount collected far exceeds the benefits it purports to fund) and not wealthy people like because they've been led to believe its only purpose is to fund the benefits (including social security) on which they rely. The estate (wealth) tax and the payroll tax have much in common: the common man detests the death (estate) tax because he has been led to believe it applies to him and the common likes the payroll tax (have you ever heard a common main complain about the payroll tax?) because he has been led to believe its only purpose is to fund his retirement benefits. Of course, it takes lots of effort and money to convince the common man that up is down and once the common man is convinced that up is down he is susceptible to believing just about anything a dishonest and delusional politician tells him.

Now my criticism of a wealth tax: it provides even more incentive for the government to adopt policies that promote rising asset prices (the higher the prices, the more tax collected). We already have policies that are intended to promote rising asset prices, which supposedly reflect rising prosperity but in fact only create an illusion of prosperity. Pity the poor fellow who pays a large wealth tax on the illusion only to have the illusion vanish in the next financial crisis.

"Pity the poor fellow who pays a large wealth tax on the illusion only to have the illusion vanish in the next financial crisis."

Exactly. And look at the incentives, a. People to produce less wealth, and b. The Govt to produce more inflation.

with an exemption (about $11 million per couple) that makes the tax essentially a wealth tax (because only the wealthy pay it).

lol that's not what defines a "wealth tax"

1. Real estate taxes are highly regressive because the rich keep a smaller proportion of their wealth in real estate.

2. The lowering of the top brackets have caused income to become wealth for the rich. It is no longer available for taxation. Some form of wealth tax may be inevitable as a result, because that's where the money is.

Kotlikoff's Purple tax claims to address this issue.

"Real estate taxes are highly regressive "

So exempt the first $N of value on an individual's primary residence.

How can real estate taxes be regressive when they are proportional to the value (asset value) of the property?

I believe he is implying that the middle class have a very high percentage of their wealth in real estate. Indeed for many middle class families, home equity is 100% of their wealth. For the upper class, their wealth will tend to include other assets.

Yes home equity may be 100% of wealth, but home value may be many times wealth.

Regressive with respect to income. Proportional with respect to RE value.

Estate taxes are wealth taxes.

Presumably if they are paid by the decedent's estate, they are wealth taxes, but if they are paid by the recipients, they are (unearned) income taxes? I thought it was the latter but could be mistaken...

What a weird coincidence. I just musing about this a week ago, although not at so technical a level (because I'm not a trained economist). Here's what I wrote:

What if the federal government were to replace all existing taxes with a flat-rate tax on wealth, not income, for both individuals and corporations, paired with a fairly high standard deduction?

States and municipalities already do something (sort of) similar to this when they tax the value of property.

Suppose all filers were allowed to deduct the value of their primary residence up to $500k, plus another $500k on top of that for married couples filing jointly or $250k for single filers. This would only affect around the top 10% of households. What would the rate need to be to achieve revenue neutrality?

Under such a system it would be much easier to build up savings when one's net worth is below the standard deduction, but it would be considerably harder to go above that since you'd need to out-earn the rate of taxation.

Possible deal killer: everybody would stash their money overseas. Other deal killer: subjectivity of appraising wealth. Another: it would hammer employers during recessions since their tax burden would remain constant even while profits are in the toilet (as contrasted with a corporate income tax).

'The next time the Democrats hold all branches of government, they are likely to try to raise these tax rates to an excessive level.'

Hopefully not something as outrageous as the rate in 1986 - 'The tax on capital gains, which is realized from sales of properties--generally securities or real estate--that have appreciated in value since they were acquired, was levied at a top effective rate of 20% until the Tax Reform Act of 1986 took effect. Under present law, such gains are treated like regular income, which is taxed at 28% for most taxpayers.' http://articles.latimes.com/1988-01-25/news/mn-25589_1_capital-gains-tax-reduction

Well the Tax Reform Act of 1986 lowered taxes, but since the Tax Reform Act of 1986 was indeed a Democratic bill, I suppose any excessive level's would be at least partially their fault.

Inflation is a tax on financial wealth, without all the collection issues. Seems like a big oversight in this conversation.

And you get to tax all the overseas dollars as well.

“your thoughts on replacing income and consumption taxes by a wealth tax?”

More practically, your thoughts on a wealth tax supplementing income and consumption taxes?

A property tax is NOT strictly a wealth tax. If you have zero equity in the home, then you have no wealth from that source. The tax is just on the gross market value of your asset.

That store of value must also appreciate by about 5% per annum to pay for maintenance, physical deterioration, and interest on debt. So at least some of the tax is on fictitious appreciation. Of course some states do provide an exclusion for this.

This is a good point. A property tax on the improved value of your primary residence seems to me to be exactly equivalent to a consumption tax. Even in the case of a rental, this cost (assuming it is a stable %) is shifted 100% to the renter and so the effect is identical.

Anyone who says property taxes are "working fine" doesn't know much about property taxation in the United States. Sorry.


Real estate taxes are a horror to those on pension or other relatively fixed income.

Less true now than it used to be. Many states have systems which freeze (or at least greatly slow) property tax increases on retirees' homes. In some cases this applies to all current property holders until the property is sold tosomeone else.

But we are told by lefties that such systems are very bad because they limit the government beast from having more to gorge on.

Your "Noah Smith" link actually goes to Ben Carlson. Your readers are being deprived of Georgist analysis!

My only real concern with a wealth tax is that it acts as a punishment on holding illiquid, longer-term assets. You either have to divert income from those assets (if it exists), or hold a percentage of your wealth in money or other very liquid assets in order to pay the annual tax.

Or borrow against the asset as collateral.

It's funny how you can always predict what position Cowen will take on an issue based on asking "What's best for the rich?" but he will always throw an incoherent mass of other supposed justifications into the mix rather than just admitting that that's his metric.

A Land Value Tax would be among the policies most likely to redistribute wealth from the rich to the poor.

Capital gains taxes are not wealth taxes. They're taxes on the _change_ in asset value, not a tax on asset value.

Position vs. velocity. Velocity is a _change_ in position, not position itself. Likewise, changes in wealth via income or capital gains are not the same as wealth itself. The Democrats always talk about "taxing the rich", but they never actually tax wealth. They always tax _changes_ in wealth by taxing everything else, like income, capital gains, sales, payroll, etc.

Higher taxes on income and consumption are taxes on _change_ in wealth. One is subsidizing the cost of maintaining property rights for wealth by taxing _changes_ in wealth. This subsidy corrupts wealth and hurts savings and investment. Wealth is subsidized and there's less incentive for risk taking.

Let's do some arithmetic.

The US government’s total revenue is estimated to be $3.654 trillion for fiscal year 2018.

About 10 years ago, John Rutledge estimated the total value of assets of the US economy to be $188 trillion, or 13.4 times GDP.

Current U.S. GDP is $19.250 trillion. If we multiply that by 13.4, we get an estimate of $257.95 trillion for the total value of assets of the US economy.

This means that a wealth or asset tax of just 1.4%, with no other taxes, would yield the US government’s total revenue for fiscal year 2018. In other words, all current taxes on income, sales, capital gains, payroll, estate, value added, excise, etc. could be eliminated and replaced with a single tax of 1.4% on assets.

So, someone that earned a dollar and spent it immediately would pay no tax. Someone that earned the same dollar and saved it for 30 years would face an effective tax rate of 1 - (1-0.014)^30 = 34.5%. I think that might have an impact on our saving rates and dependency on old-age entitlements problems.

That depends on what he spends it on. If he spends it on things that he wants to declare as his assets, he would pay taxes on his net assets. Think about the wealth tax on net assets like property insurance. If you don't declare an asset, it isn't covered.

As far as savers and investors go, we want them to do their jobs, which is managing risk in private sector investments, not parking their funds in longer maturity Treasuries.

The median NW (net worth) Americans is $68,828. This means the median American would be paying $963 in taxes under this system.

The highest median NW for household by age is $194,226 for 65 to 69 year olds. All other households have lower median NW. This means the median 65 to 69 year old household would be paying $2,719.16 in taxes. That’s taxes in total under this asset tax regime. All the other median households in other age brackets would be paying even less since they have lower NW.

Wealth taxes suffer from the same issue as income taxes - they are game-able: assessments of wealth are necessary, and in that it's similar to adjusting gains to determine income.

My strong preference would be for a uniform capital transaction tax - easy to implement, completely objective, vastly less costly to administer and it'll take care of international transactions as well.

The problem is there is so much tax avoidance going on. http://thirdwaveiscoming.blogspot.de/2017/10/q-2610.html

As the post indicates, for many corporations, paying tax is optional. Wealth taxing is not reasonable fine, corporations are not getting taxed, what can the gov tax? Consumption? These ppl do not consume in proportion to their wealth either (how many cars can a rich person buy, 100 would be crazy even for Gates).

“Taxing wealth is another way of running a higher implicit government deficit, and this is dangerous.”

Can someone please explain why this is so obvious it need no further explanation?

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