Each policy disaster, it would seem, must be revisited every 30 years or so. Debates one thought long settled — over deficits, inflation, socialism — are revived, as memories fade, the original participants die, and a new generation takes up the same discredited ideas, untainted by actual experience of their consequences.
Hence the current vogue for wealth taxes. Once common, in recent decades the world has been steadily getting rid of them. Just four OECD countries still impose a wealth tax, down from nearly 20 a generation ago. Now they are back, at least in the dreams of left-wing politicians.
Perhaps the most famous example is Elizabeth Warren, candidate for the Democratic presidential nomination, whose proposal for a two per cent annual tax on fortunes over US$50 million — three per cent over $1 billion — has revived her once-flagging campaign. Here at home, the NDP has included a proposal for a wealth tax in its campaign platform: at a mere one per cent, but on all net assets over C$20 million.
The wealth tax bandwagon has acquired such momentum that the rich themselves are clambering aboard. A group of 18 U.S. billionaires, George Soros among them, has just written an open letter demanding the imposition of such a tax, arguing, fetchingly, that “America has a moral, ethical and economic responsibility to tax our wealth more.”
The attraction of a wealth tax to politicians, if not to billionaires, is obvious. The stock of wealth in a country is typically many multiples of the flow of income; its concentration in a few hands is likewise greater. The top one per cent earn roughly 20 per cent of America’s income, but control 40 per cent of its wealth.
They also pay 40 per cent of the income tax, but never mind: by taxing their wealth as well, vast sums of money could ostensibly be raised from relatively few people, and at relatively low rates. Warren estimates her wealth tax would apply to just 75,000 families, yet would raise $2.75 trillion over 10 years — roughly one per cent of GDP annually — enough to fund all of her many campaign promises and then some.
By contrast, the 70 per cent marginal tax on income over $10 million that Democratic Congresswoman Alexandria Ocasio-Cortez has championed — nearly double the current top rate — would raise just a tenth as much, according to the non-partisan Tax Foundation, and possibly much less.
Seventy per cent sounds like a lot. People can probably grasp that at those rates there would be little incentive to earn more income, and that earning income is not something we really want to discourage. But a measly little two per cent tax, as Warren puts it, on “the diamonds, the yachts, the Rembrandts”? Would they even miss it?
Before we rush off to the Levelers Ball, however, we might want to ask a few more questions. Of these the most impolitic would be: what is the problem to which this is a solution?
It is noteworthy how the debate on inequality has shifted in recent years: from the problem of poverty, whose evils are obvious, to the “problem” of great wealth; from the gap between the poor and the rest of us, to the gap between the rest of us and the rich, or indeed between the rich and the very rich.
But it is not obvious why it is wrong, in itself, that a small number of people should get stinking rich. It is clearly objectionable if they did so by illicit or unethical means — but then it is the means itself, not the wealth, to which we object. And it would be in poor taste, at the least, if they spent it all on themselves. But that is not how the great fortunes are typically disposed of — it’s physically impossible to spend more than a small fraction of it.
Perhaps the argument is less that the rich are too rich than it is that the government is too poor. You can make a case that government should spend more on certain things, especially in America. It doesn’t follow that you need to raise taxes to do so. A lot of good new spending could be funded by cutting bad old spending.
Suppose there were a case for raising taxes. Are wealth taxes the way to go? Wealth is, after all, merely the accumulation of past income — and we already tax income. If rich people are exploiting loopholes to avoid paying tax on their incomes, by all means close the loopholes. But the case for taxing income twice seems obscure.
Yes, we already have a kind of wealth tax, in the form of municipal property taxes — and they’re a notorious mess. They conform to none of the usual principles of good taxation, being neither simple, nor efficient, nor fair.
Why unfair? The bedrock criteria of tax fairness is supposed to be ability to pay. That’s only uncertainly related to wealth. Suppose the value of your house shoots up. Congrats: suddenly you’re wealthy. But your income is unchanged. And it’s income you need, or more accurately cash, to pay your taxes. It’s not clear why you should pay more in tax than someone with the same income, but a cheaper house.
But houses at least change hands with some frequency, and can be valued with some accuracy. Not so the “diamonds and Rembrandts” Warren wants to tax — as you’d have to, if you didn’t want people avoiding tax by investing in jewelry and works of art. That’s only a small example of a far larger problem: wealth is hard to define but easy to convert, from one asset to another. Accountants can do this sort of thing in their sleep.
Chances are, then, the tax would not raise anything like the amounts claimed. The economist and former treasury secretary Lawrence Summers calculates, based on experience with the U.S. estate tax, Warren’s plan might only raise $25 billion a year, rather than the $200 billion-plus claimed. Things often aren’t quite as simple as they appear, as every generation learns anew.
Copyright Postmedia Network Inc., 2019