Why have countries moved away from wealth taxes?

From the excellent Timothy Taylor:

Back in 1990, 12 high-income countries had wealth taxes. By 2017, that had dropped to four: France, Norway, Spain, and Switzerland (In 2018, France changed its wealth tax so that it applied only to real estate, not to financial assets.)  The OECD describes the reasons why other countries have been dropping wealth taxes, along with providing a balanced pro-and-con of the arguments over wealth taxes, in its report The Role and Design of Net Wealth Taxes in the OECD (April 2018).

For the OECD, the bottom line is that it is reasonable for policy-makers to be concerned about the rising inequality of wealth and large concentrations of wealth But it also points out that if a country has reasonable methods of taxing capital gains, inheritances, intergenerational gifts, and property, a combination of these approaches are typically preferable to a wealth tax.  The report notes: “Overall … from both an efficiency and an equity perspective, there are limited arguments for having a net wealth tax on top of well-designed capital income taxes –including taxes on capital gains – and inheritance taxes, but that there are arguments for having a net wealth tax as an (imperfect) substitute for these taxes.”

Here, I want to use the OECD report to dig a little deeper into what wealth taxes mean, and some of the practical problems they present.

The most prominent proposals for a US wealth tax would apply only to those with extreme wealth, like those with more than $50 million in wealth.  However, European countries typically imposed wealth taxes at much lower levels of wealth…

It’s interesting, then, that in these European countries the wealth tax generally accounted for only a small amount of government revenue. The OECD writes: “In 2016, tax revenues from individual net wealth taxes ranged from 0.2% of GDP in Spain to 1.0% of GDP in Switzerland. As a share of total tax revenues, they ranged from 0.5% in France to 3.7% in Switzerland … Switzerland has always stood out as an exception, with tax revenues from individual net wealth taxes which have been consistently higher than in other countries …” However, Switzerland apparently has no property tax, and instead uses the wealth tax as a substitute.

The fact that wealth taxes collect relative little is part of the reason that a number of countries decided that they weren’t worth the bother. In addition, it suggests that a US wealth tax which doesn’t kick in until $50 million in wealth or more will not raise meaningfully large amounts of revenue.

There are many more excellent points at the link.  Here is another:

A wealth tax will tend to encourage borrowing. Total wealth is equal to the value of assets minus the value of debts. Thus, one way to avoid a wealth tax is to borrow a lot of money, in ways that may or may not be socially beneficial.

Tim concludes:

To me, many of the endorsements of a wealth tax feels more like expressions of righteous exasperation than like serious and considered policy proposals.

Recommended.  If you would like another point of view, Saez and Zucman respond to some criticisms here.


Ever heard of property taxes?

Property taxes are only one of the many back-handed ploys THEY use to keep out poor people.

No nation ever grew prosperous by confiscating wealth.

Taxes are too damned high.

They weaponized taxes for political purposes.

Sure, but the fact that property taxes are widely prevalent while broader wealth taxes are not suggests that there's a material difference in how they operate, and that it's difficult to expand from property taxes to wealth taxes.

Maybe, but Bill's point stands- decent proxy for wealth tax.

I took Bill to be saying that the fact that we can successfully administer property taxes means that we can successfully run wealth taxes too, and I'm suggesting that they don't scale like that.

I don't think a property tax is a "decent proxy for wealth" any more than gross proceeds from a capital gain are a decent proxy for "income". There are frequently vast differences between gross value and net. This is like saying that a hawk is a good proxy for a sparrow. They're both birds after all! And yes, the most common example of a "property tax " is one's home. What is the average delta between the gross market value of the home and the value net of mortgage? What, then, is the correlation on an individual basis with his or her "wealth"? Brian, you are usually more astute than this.

Vivian, Property taxes are a partial proxy for wealth if the owner chooses to purchase real estate. Now, you could argue that real estate could be financed by debt, but, then, the bank would have considered the wealth of the mortgagee in granting the loan.

Wow! Did you miss 2008? Mortgage lenders primarily consider income, not wealth, when granting loans. Their primary interest in "wealth" is the ability to make a down payment.

Fair enough, but property owners get tax relief on mortgage interest too.

Rich people own lots of real estate. Real estate is hard to hide. Compared to other wealth, it's easy to tax.

An imperfect proxy to be sure, but...

There needs to be a public registry of who owns what real estate for normal societal functioning reasons. Having this information, property taxes are a good way to pay for things in the local area.

(I vaguely prefer land-value tax, but there doesn't seem to be much of an urge for it, so I would not try to drag everyone there for a tiny gain.)

It's no business of yours how much gold, bitcoin, comic books, share of MSFT, or Mona Lisas I own.

"It's no business of yours how much gold, "

American's lost that bit of freedom during the 1930's.

Switzerland coincie also does not tax most types of capital gains for private individuals.

How would borrowing money help? You have a debt but also a corresponding asset.

Borrow against real estate, spend it bigly. Voila, lower net worth.

Yeah, I don't understand that point, either.

Oh, I should have clicked through before commenting:

" taxpayers will have an incentive to avoid the tax by borrowing and investing in exempt assets or – if debt is only deductible when incurred to acquire taxable assets – taxpayers will have an incentive to invest part of their savings in tax-exempt assets and finance their savings in taxable assets through debt."

Could you borrow, and then lend/gift to spouse/child/mistress who isn't rich enough to pay wealth tax?

I suppose a wealth tax wouldn't catch the Clinton Foundation or Harvard would it? If it did then the proposition is far more interesting.

Italy has a wealth tax; applies to all foreign assets.

It's Italy so it's evaded as a matter of course.

Very good post, especially this:

" But it also points out that if a country has reasonable methods of taxing capital gains, inheritances, intergenerational gifts, and property, a combination of these approaches are typically preferable to a wealth tax."

This. If only there were some way for the R and D establishment to counter the insurgents with better proposals...

An optimist would say this new Overton Window leads to a higher inheritance tax, rather than any actual wealth tax.

That would be my preference, and is certainly more achievable than a wealth tax.

Inheritance tax should be zero, as in Sweden. It's a hugely wasteful tax. Tax consumption, or land, or diamonds. Things that don't cost us so much economic growth.

You have evidence inheritance taxes cost us a lot of growth?

It discourages savings since it acts as a 50% wealth tax.

Personal opinion, with open capital flows it’s probably meaningless. Unless you’re a trade deficit moron it makes little difference if our savings rate drops to negative since we can get capital inflows from China. Only the Trumpistas care if 90% of our companies are directly owned by China.

How so? Billionaires won't save as much because when they die their kids don't get all of it? Also it's only 40%.

But yes it is a sort of wealth tax and that's the point being made, there are better ways to tax wealth than a direct, annual Warren tax.

Estate taxes also have the benefit of preventing dynastic wealth, or at least keeping it in check.

I fear the relevant comparison is to a 70% income tax rate, not to a combination of "reasonable methods of taxing capital gains, inheritances, intergenerational gifts, and property."

Which does this board prefer? AOC's new taxes or Warren's new taxes?

Fortunately, neither AOC nor Warren's views command even a single branch of government. So how about we keep working on keeping things that way instead?

Treating capital gains the same as income is my big thing. Not sure why working for a living is taxed much higher than parking money in an index fund or collecting dividends. If anything working is a harder thing to do in these days of no job stability, at-will employment, rising healthcare costs, and rock-bottom wages.

The goal is to maximize revenue. The thinking is that if we raise the rate on capital gains to the same level as ordinary income, the increased revenue from the higher rate would be more than canceled out by all the people who are deterred from selling an appreciated asset.

1. If both were taxed equally then you could lower the tax on labor.

2. Not sure what to make of the 'deterred from selling an appreciated asset'. If people delay selling an asset that has paper profits in it then they will hold it longer. Eventually it will be sold for even larger profits hence a larger tax bill.

Unless they die, then you get a stepped up basis.

More generally, people should/will hold on to under-performing assets when the alternative isn't enough to compensate for the immediate tax. e.g., 5% on $1000 > 6% on $700

Not sure if this works as a model. Let's say you have a share of a stock you got for $0 and is now worth $100. Capital gains are taxed at 25%.

Today you can cash that stock in for $100 and walk out with $75.

Say going forward you expect the stock to grow 5% per year but the economy overall will grow 10%. Absent tax, it would make sense to sell off the share and take that $100 and put it into a market index. Get $10 growth per year rather than $5.

What if I leave the $100 to avoid the tax? Well I'll get $5 per year going forward of price growth. But if I take the 25% hit and put $75 into the economy I'll get $7.50 per year going forward. Nothing is gained by forgoing a clearly superior investment going forward just to avoid the tax *unless* I suspect I might be able to lobby and get the tax repealed/forgiven/etc. Let' s say I suspect the incoming President will cancel the tax. Then I'll actually hold the bad stock another year, let it grow to $105 then sell when the tax is cancelled. I'll have $105 while the guy who sold and brought the better stock will have only $75+7.50=$82.50. If Republicans look like they can rent seek, they will actually cause the evil they say they want to avoid!

Of course the other problem with this model is who would I sell my $100 share to today? Someone with $100 cash. If the economy as a whole is expected to grow 10% rather than 5% my stock is expected, that person can just as easily put his $100 into the market index. A tax might lock me into a bad investment but it doesn't lock the economy out of funding a good investment.

Why not just follow it to the logical conclusion and tax savings directly?

That’s the effect. Hiding it just makes it idiotic. Especially Since inflation isn’t taken into account.

So tax earnings at 35% and savings at 5%.

I earn $100, I pay $35 to the government. I save $20. Every year that $20 is taxed $1 into perpetuity. Why disguise it as “capital gains?”

Because that's not income. If I make $5 waiting tables or $5 interest on a savings account in both cases I've earned $5 and that is what is being taxed.

Not sure what you're saying in point 1, but any rebalancing of rates still has to consider whether it's raising or reducing revenue overall. Point 2 assumes a continued rise in asset prices. Also, people might forgo realizing the gain at all, and simply decide instead to go without whatever frivolous consumption good they planned to buy with the proceeds. I.e., they stock with the iPhone 10 instead of upgrading to the iPhone 10 1/2. :-)

In terms of #1, some labor is withheld because labor is taxed at a higher rate than capital gains. That has a cost too. If making the two equal has a downside in causing some people to hold assets longer than they otherwise would have, that has to be offset against the potential gain that lowering taxes on labor would have. Maybe one guy holds his bitcoin an extra 5 years but another guy does some uber/lyft/side gig.

2. If you think prices are going to fall you're going to sell. If the price of a share today is $100 and tomorrow it's going to be $60, it makes no sense to stay in that stock because you don't want to pay taxes on the gain. If you're paying taxes it is because you brought low and sold high.

So I won't sell my 10 share today to buy an iPhone 10? OK so the guy who was going to buy my 10 shares now has a pocket full of cash. If the shares are too expensive for him (because people like me don't want to pay the taxes) then buying the iPhone 10 starts looking better to that guy.

But this whole enterprise is insane.

Tax consumption on a progressive schedule.

"Treating capital gains the same as income is my big thing. "

There are multiple factors:
Maximizing tax revenue has already been mentioned.

Inflation adjustment is another one. You have to compensate for real versus nominal changes in value. This could be fixed by taxing the real gain (tax basis = current price - historical price + inflation) .

Double taxation: Stocks, dividend, etc are the profits of companies that were already taxed once. This could be fixed by Zeroing out company taxes.

Taxing future consumption: Capital gains are taxes on deferred consumption and we want people to spend money to build things. The higher capital gains taxes are the less people will save.

"This could be fixed by taxing the real gain (tax basis = current price - historical price + inflation)". We used to do that in Britain. It was scrapped for individuals by the last Labour government. It's in the process of being scrapped for businesses.

I don't get the inflation adjustment aspect. Are capital gains taxed lower than income as a sort of trade off so you don't have to lookup and calculate inflation rates? The discussion of whether capital gains should be given different rates than labor seems distinct from the question of whether capital gains should be adjusted to take out the portion of profit due to inflation.

Let's say there is no inflation adjustment in calculating capital gains taxes. I have $100 to buy stock with and you happen to be a start up company that makes a convincing case you can produce a gain to me over 5 years. Buy now for $100 and in 5 years I can probably sell for $500. Yay!

But wait, there's no carve out for inflation in the tax. OK I tell you I either need in for only $90 since I'm losing some of that gain to inflation.

Notice on savings account interest there is no reduction made for inflation, even though it's presumed nominal interest rates must reflect some expectation for inflation.


What don't you get? The effective rate is much higher if you don't take into account inflation.

He’s a MMTer.

Facts have no bearing on their opinions.

Nominal gains being taxed as income is even better in a MMT world of 20% inflation. Redistribution!

We generally don't index for inflation with taxes. When a business buys $100 worth of inventory on New Year's Day and sells them at the end of the year for $102 the cost of goods sold is not increased by $2 if inflation ran 2%. Likewise your deduction for giving to charity is not reduced for inflation. If your boss gives you a 2% raise you don't deflate that either.

"If your boss gives you a 2% raise you don't deflate that either."

What planet do you live on? We call 2% raises a cost of living raise and no one at my business would consider it a real raise. It's a nominal raise, so that you don't make less money than the year before ... and so the employees don't find a better employer.

You can call it whatever you want but it isn't adjusted for inflation on taxes. If in 2018 you made $100K and paid $30K in taxes and in 2019 you make $102K you will pay more than $30K in taxes.

"You can call it whatever you want but it isn't adjusted for inflation on taxes."

Of course it is. I'm paying with a currency that's gone down in real value by 2%. That's what inflation means...

OK so then how come that works for your cost of living wage increase but for capital gains you need to calculate an inflation adjustment or else it's unfair?

Are you trolling me?

Ok, I'll assume that the question is legit.

In both cases I had to calculate an inflation adjustment. The whole point of the company paying a cost of living increase is that it's an inflation adjustment.

Errr I don't think so. Say the tax rate is 25% both on capital gains and income.

You buy some shares for $100K and sell them a year later for $102K. Your profit is $2K so your tax bill is 25% * $2,000 = $500.

You earn $100K working at your job, tax bill is $25,000.

Next year you do the same thing but inflation is 2%. Your boss pays you $102K. Your tax bill is $25,500. Your tax bill from making $2K flipping stocks is $500.

Right now you don't get to adjust your profit on the shares to acount for inflation nor do you get to adjust your raise. In both cases the tax code just works with nominal changes without regard to inflation (a dollar earned on Jan 1 is no different than a dollar earned on Dec 31st, even though inflation for the year was 2%).

From what I'm reading here, it seems like advocates of capital income are saying you should be allowed to adjust your cost basis every year for inflation. If inflation is 2% then you increase the cost of your shares by $2K therefore when you sell for $102,000 you actually declare zero profit and therefore pay zero tax. But this is NOT done for your $2K 'cost of living adjustment' raise.

Keep in mind that tax brackets are adjusted for inflation each year:

The Internal Revenue Service obligingly publishes a list of updated figures and inflation adjustments each November, scheduled to go into effect at the first of the year.

True but just helps you from 'creeping' into a higher bracket due to inflation. It doesn't actually adjust your taxes to account for inflation anywhere else.

Let me provide an example that makes this clear:

Assume that you own a $100K house. That inflation is 10% per year and that the value of the house matches the rate of inflation.

After 7 years you need to move to another city and you wish to buy a similar house.

Assuming you have a capital gains tax rate of 25% without inflation adjustment, the value of the house when you sell is $200K. The government wants you to pay $25K in capital gains taxes. (25% * $200K-$100K)

When you move to the city, you can't afford a similar house after paying taxes, because identical houses are selling for $200K and you only have $175K.

So what? I used to own stock in Myspace when I could have owned stock in Facebook. Today I sell my shares of Myspace but discover I can't afford shares of Facebook!

Did the house in city B also start out at $100K and increased to $200K just like your house? If so then it would seem inflation just functions as a sort of indirect wealth tax.

But then having been burned once you could approach the market in city B saying "I know you're listing for $200K but as you know there is no income tax adjustment for inflation therefore I should offer you only $175K. " Both the starting and end prices should adjust to consider the fact that taxes are not providing favorable treatment to the capital gains of home ownership (even if the gain is just keeping pace with inflation).

Actually we do. This is why we have indexed the brackets to inflation since the 80s. If we truly were not deflating in our accounting then we would watch the income bracket become ever more regressive every year.

The simplest thing to think about is a stagnant income with inflation. Say inflation is running 5% and you make $100,000. This year $17,500 is subject to 24% taxation. In five years all of it will be taxed at 22% or less. Further the standard deduction increases with inflation (going up $400 this year). Due to changes in brackets and things like the standard deduction, a nominally stagnate wage results in lower taxes paid in both nominal and real terms.

"Buy now for $100 and in 5 years I can probably sell for $500."

The background idea is that mere inflation gains aren't "income." That is, you have the same amount of real goods at T1 and T2, regardless of what amount of currency they correspond to. Money, after all, is just an abstraction.

So... the proper way to tax capitol gains would be to split your nominal gain into 'real' and 'inflation' portions e.g., the $400 nominal CG in your example might become $350 real and $50 inflation. You would then tax the real portion at ordinary income rates, not the capital gain rate.

In practice, this is too cumbersome, so we created special short-term and long-term capitol gain rates to kinda, sorta approximate the proper situation.

Actually the split between short and long term capital gains, I believe, was done on the theory that long term buy and hold stockholders encourage a 'long view' rather than 'quarter to quarter thinking' that short term holders would presumably push firms to engage in.

Again you don't get this in interest income

If you wanted to approximate the proper situation then you should have multiple long term rates. Right now you have a rate for 364 days and a rate for 365+ days. But in a low inflation environment there's not really much of a difference holding an asset for a few years but over a decade or more it adds up.

And the cumbersome argument doesn't really hold much water either. In order to calculate capital gains you have to keep track of when you brought and when you sold the asset. If you're doing a lot of trading and don't like keeping track of paperwork this is where the cumbersome aspect hits hardest.

Once you already know asset A was purchased on Day X and sold on Day Y it's trivially easy to add a deflator to the calculation.

I'm not completely opposed to taxing capital gains as income, but there is a reason just about every modern economy on Earth, including strongly left-leaning governments, give preferential treatment to investment income. That is a fence you should understand before tearing down.

That is a very good discussion by Taylor. He's well-informed and not only conversable but also very cogent. Thanks for posting that.

"That is a very good discussion by Taylor."

+1, this is obviously Tyler's good twin sister's name. She's both a lot nicer than Tyrone, but also a much better singer.

That creation of wealth is taxed rather than possession of wealth is precisely what is wrong with the tax base. Taxing creation rather than possession is precisely backwards from the fundamental standpoint of proper statecraft.

When you create something you are not costing society anything. When you possess something you are: the cost of defending your right to possess that thing.

It's that simple.

When you have assets beyond those you, yourself, can effectively defend (such as your house and essential tools), the only reason you can claim them is the existence of the government to enforce your legal rights and protect them from foreign invasion. You want this service for free and to have people who are engaging in transactions to pay that fee for you. That's unfair of you.

I think society is better off if we assume that subsistence farmers need the protection of the law like everyone else.

More generally, I don't think the distinction you draw between income and wealth holds up in practice. Income needs protection of law too. The economy as a whole benefits if I have confidence that I can seek enforcement against my employer if it doesn't pay me.

How would a subsistence farmer pay a lot in a wealth tax environment?

Suppose I happened to own Trump Tower but I didn't rent out any rooms, had no businesses inside it. I just kept the whole thing empty and vacant in the middle of one of the most expensive real estate markets in the world where rents are sky high.

Next door is another chap who also owns Trump Tower (well an exact copy). He is a busy landlord providing apartments and offices to the many people and businesses in Manhattan who desperately want access to the location. He collects a lot of rent and is always hussling.

From an income tax point of view, I claim poverty. I have no income. don't tax me tax him. From a wealth point of view, though, we both are equal and if you tax us equally it's really hard on me but easier for him. Is that unfair to me? Or is it fair that I demand to keep a productive asset idle in the middle of a very active city and pay little or no tax because I'm 'poor'?

"is the existence of the government to enforce your legal rights "

Don't local property taxes and sales taxes fulfill that role? When I buy something, I pay sales tax. Which pays for the local courts and police to protect the property I just bought. Property tax pays (imperfectly) for the protection of the assets I already own and funds the schools to ensure the society remains prosperous and stable.

"and protect them from foreign invasion."

If you are talking about the Federal level, then I would advocate a Federal VAT tax. This is what most nations of Europe use.

The fact that the government protects property rights without charging a use fee for providing that service while taxing economic activity (sales, income, capital gains, etc.) and providing a "risk free asset" basis for the portfolios of the wealthy has lead to a profound corruption among the wealthy and has incentivized parasitism among the wealthy rather than investment in the creation of wealth.

If you have a “risk free asset” basis for your portfolios you will become a “no brainer” investor. This leads to favoring labor over automation hence falling into the immigration trap.

Incentives are everything and the current investment environment rewards rent-seeking either via the risk free asset or via public choice special interest lobbying.

"capital gains, inheritances, intergenerational gifts, and property, a combination of these approaches are typically preferable to a wealth tax"

The reason these taxes seem substitutable for each other seems to be because they are all taxes on savings. They have nothing to do with wealth or well being. Consider two people with identical incomes and, thus, are equally well off. The one that saves more, whether that savings is in the form of financial investments or owning property, will end up paying more tax than the one that consumes all of his income immediately. We should just call of these taxes savings taxes to highlight their essence and similarity.

The question then becomes whether our tax laws should penalize saving.

The advantage of those other taxes is simply that they're easier to administer. Transactions (asset sales, gifts, inheritances) are discrete and easily quantifiable events. Real property is publicly valued according to a system that is stable over time and reasonably comparable across taxpayers. Valuation of artwork and small businesses doesn't have those advantages.

Even the valuation of publicly-traded stock presents challenges. My wealth was quite different in January, August, and December last year, for instance. (And picking an arbitrary date for measurement will inspire a lot of tax-avoidant sales strategies around that date, producing regular uneconomic fluctuations in the market.)

Right- so get rid of those taxes and use a progressive consumption tax that's easy to administer and penalizes extravagant spending.

A progressive consumption tax would be a nightmare to administer; it would require tracking of every purchase and outlawing untracked transactions (including cash, cryptocurrencies, and barter) And a new law enforcement branch to enforce that, something largely indistinguishable from a panopticon police state dystopia.

You could try to proxy progressivity, heavily taxing luxury goods and zeroing out necessities. But that's going to bring in new problems and likely won't let you curve out the progressivity as much as you would want anyhow.

OK, "taxable wealth" won't be perfect. Of course, neither is "taxable income."

And who cares? Ultimately, the question should be whether the two systems are complementary (fairer? more effective?) together. My guess is yes; strategies you use to game the wealth tax will interfere with the strategies you use to game the income tax. Additionally, "smaller rates on a wider base" reduces the incentive to game.

In practice, I'd predict a wealth tax to be limited to easy-to-calculate assets: cash, publicly traded stocks, and real estate. Yes, that will miss significant wealth in privately held businesses, collectables, etc. We'll all get comfortable with it anyway as in implicit subsidy to entrepreneurship, with lots of editorials about how "small businesses create more jobs," yada, yada, yada.

If a U.S. wealth tax is passed - which I don't find terribly likely - there is virtually zero chance that it would exclude privately held businesses. If this tax could pass, there'd be an immediate realization that it excluded the majority of wealth of owners of sizable privately-held businesses. It would also create a huge and easily foreseeable incentive for companies to remain private, or for publicly-traded companies to go private.

I'd also be shocked if there was any broad exemption for personal property (including collectibles). Perhaps there would be an exemption for individual items with a value up to something like $50k or $100k, but a major point for proponents would be to make sure that wealth tax is paid on items such as expensive works of art.

"huge and easily foreseeable incentive for companies to remain private, or for publicly-traded companies to go private. "

Balanced by the difficulty in raising capital. Not to mention, the inability to use corporate assets for personal consumption (and the IRS is already good at policing that line).

The Mar's Family would be extremely happy with it.

I've been giving some further thought to the valuation issues of a wealth tax if combined with the other taxes that we have and that Warren et al are proposing we keep and most likely increase (income tax, capital gains, estate, gift, etc). The complexities are vastly understated both from the theoretical and the practical perspectives.

In my prior life I had considerable experience in advising clients on the tax implications of purchasing or selling a corporation. Anyone with experience in this area knows that it is common to do a "due diligence" examination. For tax, this is important because all of the tax attributes of a C corporation carry over to the purchaser. Thus, it might have an asset on its books valued at $200 with a built-in gain of $100 (when the asset is sold, it would be subject to tax (say a future levy of $35 at a rate of 35 percent). In valuing that asset, and thus the company as a whole, one would need to consider that as a "deferred tax liability" and discount that to present value to arrive at an estimated current value.

It strikes me that when valuing an asset for purposes of the wealth tax, the issues are similar. Let's consider how to go about determining the value of assets in my hands if I'm subject to the 2 or 3 percent wealth tax *and* ultimate capital gains tax on my appreciated assets *and* a very high marginal rate of income tax on the future stream of income. I don't think that the value of that asset *in my hands* is the same as the value of the asset as, say, reflected in the market. The average anticipated present value in the market of a future tax is much lower than mine, so the market discount is lower. If the purpose of a wealth tax is tax *my* wealth (and I submit it either is or at least should be), then the value of the current assets need to be discounted by my anticipated future tax liability. That includes all taxes, wealth tax included. A share of stock might trade for $100 on the stock market, but if I'm the exceptional person subject to an *annual* 2 or 3 percent wealth tax *and* other top marginal rates, then the present market value of that asset *in my hands* is far, far less. (I invite someone to do the math).

I hope, but I seriously doubt, that those doing the revenue estimates on the 2-3 percent annual wealth tax have taken this into account. If one doesn't, the issue should go all the way to the Supreme Court.

This is one of the reasons the "step-up" in basis was introduced for appreciated assets subject to tax under the estate tax. When Bush II proposed that the estate tax be abolished, he also proposed eliminating step-up. This is both logical and consistent both from the perspective of avoiding double taxation and the valuation conundrum. What would not be logical and consistent would be, in the absence of step-up, to value an asset for estate (or inheritance) tax purposes simply at "market value" and fail to discount for the anticipated future tax on the built-in gain.

These are serious complexities when one tries to combine a wealth tax (which is not based on a transaction in which tax attributes such as the cost basis resets) in combination with numerous other taxes that affect the same asset and the same taxpayer.

" If the purpose of a wealth tax is tax *my* wealth (and I submit it either is or at least should be)"

Vivian, the stated reasons are to make the wealthy poorer and to thus lower inequality. Senator Warren isn't giving speeches focused on the US debt. She's giving speeches focused on US inequality.

The taxes are the justification and certainly a secondary consideration, but clearly not the primary reason.

You may be correct and that seems to be the stated objective which I doubt they deny; however, that's not at all my point. The point is the proper reference when valuing an asset that is subject to future income tax on a built-in gain and/or future on-going wealth tax in the hands of the same taxpayer. This is a valuation issue, not a motivation issue.

I do not follow how a wealth tax encourages debt. Debits equal credits.Let's fantasize and say I have assets worth 75 million dollars, above the 50 million dollars threshold. I borrow 40 million dollars. That 40 million dollars, if it stay as cash or is put in assets (which by definition have a market value) increases my assets to 115 million with 40 million of liabilities. My net worth remains the same.

I could spend the 40 million dollars on hookers and cocaine and see my net worth decline to 35 million (75 million less 40 million). Or I could just sell the 40 million dollars in assets.

Which reminds of the baseball pitcher Tug McGraw's approach to wealth and saving. When asked how he spent his signing bonus he said"I spent 90% on fast cars, loose women and fine whiskey. The other 10% I wasted".

Debt allows you to hold low liquidity assets without being hit by the tax. For example you have $100 million in real estate. You can then borrow $100 million in liquid funds and buy "assets" not in the country. You can then claim that you made poor investments and lower your book wealth.

The other option is to use debt to buy favored assets that are taxed less, like government bonds. You could build a wealth tax without such carve outs, but that never seems to happen in the real world.

Sure, but some day you'll want that money back, and now* you'll now have to pay income tax on the repatriated funds.

*presumably, they'll tweak income defns to work cooperatively with the wealth tax. It's a tax system, not a collection of separate taxes.

"I do not follow how a wealth tax encourages debt. "

I am worth $100 million and the tax rate kicks in at $50 million. So, I borrow $50 million and use it to buy state bonds.

The state bonds are exempt from Federal taxes and thus my taxable assets are under the $50 million cap.

If you mean municipal bonds when you say 'state bonds', yes their income is tax free but why wouldn't they could as an asset and part of your wealth?

count (not could)

I'm sure they could be counted, but not without potentially disrupting the municipal bond market. Outside of Alaska, the states with large bond issues are Blue states.

Table 3

But if they are still income tax free why would holders sell just to avoid them being counted as wealth? If you switch to another asset that would get counted too.

And this isn't really a red vs blue issue. Plenty of blues have lots of wealth to be taxed.

The presumption is that if you remove a portion of their tax advantage they loose a portion of their value versus other investment. Municipalities get a better (lower) interest rate on bonds because they are tax exempt. This is essentially a transfer from the Federal tax coffers to the state tax coffers.

"And this isn't really a red vs blue issue. Plenty of blues have lots of wealth to be taxed."

You got my point backwards. Most bonds (by a substantial margin) are from blue states. I would strongly suspect that Senator Warren of Massachusetts plans on keeping the massive amount of bonds certain states (like MA) have issued tax exempt.

I'm still not following you. I agree muni bonds will continue to pay tax free interest, and that it's a lot of blue states issuing them.

But the wealth tax is another thing. I don't expect muni bonds to be wealth tax free, nor will they drop in value vs other investments as those other investments will also not be wealth tax free. You are not removing anything vs other investments, presumably all securities would be taxed as wealth. Munis would continue to be valued as they are, being free of income tax.

Concerning wealth tax, this quote: "In 2016, tax revenues from individual net wealth taxes ranged from 0.2% of GDP in Spain to 1.0% of GDP in Switzerland."

1% of GDP wealth tax revenue looks small but first take into account the tax-to-GDP ratio in Switzerland is around 29%. Then remember that federalism is a thing in Switzerland. The federal budget is only ~10% of GDP, that means cantons and municipalities excise and spend ~19% of GDP. So, wealth tax contributes to 5% of tax revenue for cantons and municipalities. Is it OK to call it a small government revenue?

The local to federal government tax revenue is 1.9 for Switzerland. Just for comparison, it's 0.35 for the USA (federal taxes = 20% GDP / state taxes = 7% GDP). God bless federalism ;)

Finally, this quote is wrong: "Switzerland apparently has no property tax". Remember federalism? The property tax/vermögensteuer/impôt foncier is alive and is set by cantons and municipalities https://www.ch.ch/en/property-tax/

The wealth tax is a diversion (a diversion coming from the left but highlighted by the right both because it isn't going anywhere and because the right doesn't want to consider any alternatives to cutting taxes on the wealthy). Our current tax system encourages reliance on rising asset prices for prosperity. Of course, rising asset prices further increase the wealth of the super-rich and inequality, while discouraging the non-rich and causing a lot of hand-wringing by economists who prefer to look the other way rather than address the ticking time bomb. We have spent 40 years reducing tax on capital while increasing tax on labor, with the promise that the former will cause an economic flourishing and shared prosperity. It's an unkept promise. But if we eliminate all tax on capital, then the economic flourishing will begin. Not. The failing by economists should be a scandal in the profession, but it's not. Why? Good question. But rather than simply condemn, I say encourage economists to help craft a tax system that for a change induces owners of capital to invest in productive capital rather than in speculative financial assets and rising asset prices. Cowen is the leading candidate, not only because he is smart, but because he has staked his reputation on a better future, a better future that won't be found by repeating the same old policy prescriptions. What's the alternative? A wealth tax? Cowen, and we, can do better.

"We have spent 40 years reducing tax on capital while increasing tax on labor"


A tax on wealth can also be expressed as a tax on assets held. Since one way or another some part of those assets, whether these are liquid or not, have to be disposed of so as to pay for the tax, negative unexpected consequences might always be lurking.

Anyone wondering about Prof. Cowen's current passion resisting the very idea of a wealth tax need look no further than this - 'Sixty-one percent of voters in a new Politico-Morning Consult poll say they support a tax on high levels of wealth such as the one proposed by Sen. Elizabeth Warren. Twenty percent say they oppose such a tax, with 19 percent saying they weren’t sure either way.

The tax received net support among Republican voters, with 50 percent supporting it and 30 percent opposing. Fifty-six percent of independents said they supported the tax, as did nearly three-quarters of Democrats.

It’s another data point in recent polls showing a broad appetite among American voters for raising taxes on the wealthy.' https://www.washingtonpost.com/us-policy/2019/02/05/over-percent-voters-including-half-republicans-support-elizabeth-warrens-wealth-tax/?noredirect=on&utm_term=.afd345dce387

If only someone can manage to connect death and wealth taxes in a pithy combination, the money will flow to ensure that we hear it as often as we heard death tax and death panel.

Of course, if someone supporting wealth taxes can come up with an expression like robber baron, the money will not flow nearly as well. Though luckily, at least wikipedia recognizes the difference between two types of robber baron -

Robber baron (feudalism), term for unscrupulous medieval landowners

Robber baron (industrialist), term for unscrupulous 19th-century American businessmen

The OECD gets it backwards. From an incentive perspective, a wealth tax is much better than a combination of a capital gains tax and an inheritance tax. Their reason for preferring capital gains taxes is as follows: "While there are important similarities between personal capital income taxes and net wealth taxes, the report shows that net wealth taxes tend to be more distortive and less equitable. This is largely because they are imposed irrespective of the actual returns that taxpayers earn on their assets."

In other words: the OECD finds it unfair when people that employ their capital productively are taxed the same as those who buy useless stuff (e.g. luxury goods). But from an economic incentive perspective, this makes absolute sense: take the capital away from those who do not know how to employ it productively, and in turn do not levy a capital gains tax from the risk-taking, successful entrepreneurs (those are the ones who usually suffer the most from a capital gains tax as they cannot easily diversify).

There are many more good arguments for a wealth tax. The main reason for not being more popular is probably that the "old money" has too much political influence in most countries. Maybe it is not an accident that the one country where it provides significant tax revenue (Switzerland) is a direct democracy (making it much harder for the elites to get rid of the wealth tax)?

Cutting the capital gains tax was the centerpiece of the Bush tax cuts, which produced the most anemic economic recovery post-WWII.

This would seem the obvious place to look for those interested in scrounging up more simoleons from the wealthy.

Prior to Bush the highest capital gains tax rate was 20%. It's currently 23.8%.

See chart 2 here. The relevant issue in regard to your example and simoleons from capital gains taxes is what effect those Bush cuts had on CG revenue. The data on is pretty debatable.


I don't think that's right Vivian. Obviously, when you cut the capital gains rate, you get a lot of pent-up gains producing tax dollars right away.

From your link: "Despite surging economic growth and 5 million new jobs since 2003, critics also charge that the tax cuts have not helped the economy."

5 million new jobs in four years? This is not surging growth, it's barely organic growth. Hell, we've seen 5 million new jobs in the past two years, many many years into a 21 million job recovery.

Of course, the surging Bush recovery petered out shortly after the article was written.


Again, my point was that the CG rate reduction did not result in a decrease of revenue from CG. It was the opposite—The data is straight from the CBO. Are they wrong?

I concede your narrow point and stand by my original comment and follow-up.

I'm probably slow, but what was your point?

Are you saying we should raise Capital Gains taxes again? Even though they are higher than they were during the Clinton years?


I misread the chart. Capital gains were higher (30%?) at the start of the Clinton administration and were dropped to 25% during that period.

My point is that taxation is an art. If you want to raise taxes and slant the tax increase toward the wealthy -- which is what the whole "tax the rich" brouhahaha is about -- capital gains taxes look like low-hanging fruit compared to many stupider and more impractical ideas being considered.

If you think the rich pay plenty in taxes today, you reject all of this. I honestly can't make up my mind on the larger question.

"which is what the whole "tax the rich" brouhahaha is about "

I think you miss the point.

Warren Buffet paid a total of $1.8 million on $11.6 million of income in 2015. Even if the capital tax rate were 50% he would have paid less than $6 million.

Under the 2% Warren wealth tax rate he would have paid about $1.7 billion. $1.7 billion versus $6 million.

That's the point.

The Elizabeth Warren Buffett tax

The point is that Warren's proposal is impractical, won't happen, and doesn't interest me.

At which point, I descend to the realm of the practical -- where Lizzie et al might land after the stupidity wears off.

It's like all the lefties are imitating the Trumpian Big Open (Build a wall, Mexico pays). There is a negotiating logic here, but nobody takes the open as a serious proposal.

Ok, fair points. I didn't understand your implied point that the Wealth Tax was that far a stretch.

That being said, I'm not sure your bias isn't affecting your judgement. The polls don't indicate this is that wild an idea.

"Over 60 percent of voters - including half of Republicans - support Sen. Elizabeth Warren's wealth tax, poll shows
The tax received net support among Republican voters, with 50 percent supporting it and 30 percent opposing. "


Maybe I'm complacent, but I'd certainly be prepared to plop down a substantial sum of the hard-earned around a suitably structured bet here rather than argue about theoretical wealth taxes.

Depending on how poll questions are asked, you'd be surprised at what you can get the American people to support. I don't put much stock in these things.

"Depending on how poll questions are asked, you'd be surprised at what you can get the American people to support. I don't put much stock in these things."

Fair point.


I'm on your side with respect to the wealth tax not-going-to happen bet. However, unless you step up to point out that it *is* impractical, etc. (even if that may seem obvious to *you*), the chance of it actually happening is no longer "theoretical", although I agree that it is exasperating and a seeming waste of time and effort to bat down silly ideas. Saez, Zucman and Warren are, unfortunately, real and serious and I wish that AOC were a figment of my imagination...

McGovern '72.

btw, I actually like AOC. Beats the roster of fossils the Dems trot out otherwise.

She has SOOOOO much to learn, but she also has a certain je ne sais quoi, no?

She drives a lot of people nuts, though, that's for sure.

She's the Sarah Palin of the Left.

That's the worst kind. A lot of people felt (and still feel) the same way about Che and Fidel. How did that turn out?

For the record, the Netherlands has a 30% income tax on people's notional capital gains, which are assumed to be 4%. So that's equivalent to a 1.2% wealth tax.

The anti-libertarian often says, "Taxes are the price we pay for a civilized society." Obviously not.

Comparing the US tax system to Europe's is misleading in lots of ways including that most European countries don't tax worldwide income so there are lots of devices for "earning" income and holding wealth in low tax or no tax jurisdictions as well as under a variety of legal forms with the ultimate ownership nontransparent. One gets the feeling listening to the academic economists on this subject that they don't understand how the world really works.

'that most European countries don't tax worldwide'

Well, they don't tax income earned outside of their borders twice, in comparison to the U.S.

I'm wondering if any bright people have wondered what the effects on the stock market are likely to be. Essentially a 1% tax on the wealthy is unlikely to effect their consumption as much as it is to effect their investments.

Current capital gains taxes merely effect stocks that are already being sold. A wealth tax of this type will force a lot of wealthy people to start selling off their stock. Is that enough downward pressure to effect the value of the middle classes 401Ks and pension funds?

One might also ask whether 401Ks, IRAs, pension, and post-retirement health care benefit NPVs should be included is wealth tax assets. They are routinely considered as wealth in divorce settlements. While this would seldom be an issue with a wealth tax starting at $50 million, it could be common with a lower wealth tax exemption amount.

For instance, the estate tax exemption in 2019 is $11.4 million, but it was only $2 million as recently as 2008, and $600K in 1997. https://www.thebalance.com/exemption-from-federal-estate-taxes-3505630

Using the BLS CPI inflation calculator, $600K in 1997 is about $950K today. https://www.bls.gov/data/inflation_calculator.htm

Rounding to an even million, one could predict a proposal that the estate tax exemption and/or the wealth tax exemption should be $1-2 million, not $50 million. I suspect quite a few pensions would be subject fall into that range.

What is the NPV of lifetime tenure?

That's a fair point. I wonder if they've thought about that, combined with income taxes, a 2% to 3% wealth tax implies greater than 100% taxes on fairly broad swathes of bonds at current yields. And it implies very high marginal rates on parts of the bond market where after-tax nominal yields are still positive.

The 10-year treasury yield is about 2.7%. Take off the 37% highest federal marginal income tax rate and a 2% marginal wealth tax, and that's a negative nominal return.

Muni bond yields out to between 5 and 10 years are currently below 2% - https://www.bloomberg.com/markets/rates-bonds/government-bonds/us

An index of U.S. Corporate BBB yields (i.e., lower level investment grade bonds) is at about 4.4% ( https://fred.stlouisfed.org/series/BAMLC0A4CBBBEY ). So, at the 37% marginal federal income tax rate and a 2% wealth tax, that reduces the after-tax nominal yield to about 0.8% (vs. 2.8% under current law).

But only for billionaires. The local dentist isn't paying that wealth tax.

I oppose it, but let's not get too far in the weeds. Billionaires would have lower returns to their wealth (if they didn't hide it or leave the country)

"But only for billionaires. "

Warren's tax proposal is 2% over $50 million. So, very rich, yes. But not just billionaires.

It goes up to 3% at $1 billion in wealth.

Does it make sense that a Bill Gates, worth maybe a hundred billion, and who keeps his wealth locked up in shares of Microsoft, pays a trivial amount in taxes and will end up paying very little because he has/will transfer his wealth to his pet charities (which will not benefit American taxpayers)?

one should note that Gates and others in his league are tireless advocates for higher income taxes, which of course they will never pay.

Money invested in a public company is "locked up"? That's what we want people to do, invest it in companies.

Gates's money is not 'locked' inside Microsoft. If tomorrow he decided to cash out his shares he wouldn't take a check from Microsoft but from other individuals who would buy his shares from him on the open market. Microsoft's bank account wouldn't be hit.

Likewise if you buy shares of Microsoft you aren't 'investing' in a public company in the economic sense. You're not giving Microsoft cash for them to R&D the next Windows. You're buying shares from someone else who is selling.

You're missing the point, which is that the monumental capital appreciation of his shares, which constitute his wealth, in not subject to taxation as long as he holds them. And he will hold them until he has given them to some charity. That may be good or bad but the guy making $50,000 a year is paying taxes on his income; Gates is not paying taxes, and never will, on most of his wealth. You can be all in favor of low taxation but it's not easy to justify this disparate treatment.

I'm seeing both angles here. Suppose someone making $50K a year tells his boss to stop paying him and just send the money to a charity. He won't pay taxes either. If price of Gates's shares goes up $50K in the next 60 seconds, but Gates can't touch that $50K unless he's willing to pay taxes on it.

The economic argument I'm hearing is sounds something like Gates has all this money locked up in Microsoft, if taxes were gone or lower he could nimbly sell off those shares and put the money in some other up and coming company that will do something better for all of us than yet another version of Windows.

Here I don't see how that argument makes sense. Even if Gates is 'locked in' by taxes, whoever would have purchased his Microsoft shares is by definition just as free to buy that better company instead.

More radical idea I've floated before: Just eliminate taxes entirely. Have the gov't run via deficit, have the Fed target money supply for low inflation low unemployment.

1. Gov't spending would actually fall. No taxes means no dead weight loss from taxation. It would also mean many income based gov't programs would see lower spending pressure.

2. It would provide a lot more clarity to economic policy.

I'm getting more and more people telling me that "deficits don't matter" so I guess your idea is the logical conclusion of that.

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