The topic of a wealth tax has come up quite a bit over the last couple of years. Certainly the writings of Thomas Piketty and concerns about wealth inequality and income inequality have raised the topic of a wealth tax, along with the presidential campaigns of Bernie Sanders and Elizabeth Warren. Recently, Bloomberg's Leonid Bershidsky (who was born and raised under communism in the Soviet Union) wrote on the topic, raising Bill Gates' tepid endorsement to the the title of his column.
It is important to note, Gates' recent tepid support for a wealth tax is very different from his prior position which was to increase the rate of taxation of capital. Gates correctly noted many of the super-wealthy generate income from capital gains, and taxing capital gains at the ordinary income rate would go a long way towards tax fairness. In fact, it is the lower rate of taxation for long-term capital gains that is leveraged in many forms of executive compensation. It is not even stock options any more, where the executive has "skin in the game", now it is direct stock grants.
Another potential form of wealth tax long supported by Gates is the inheritance or estate tax. This is another idea which comes up from time to time, today more focused on very large estates. The estate tax of the 20th century had very low thresholds and was very destructive to small businesses and family farms. It was deeply immoral in how it was implemented. The estate tax was far more destructive to those with small fortunes than those with large fortunes, so it was understandable that the super wealthy like Gates and Warren Buffett favored it--It had the effect of destroying potential rising competitors to large businesses. Gates' lawyer father could afford to send Gates to Harvard. The son of a family farmer who loses his parents farm to the estate tax when his parents dies cannot afford to send his son to Harvard. While generational wealth can create generational plutocrats, generational wealth can also create generational middle classedness, free of the need of government support, and that is something we should strive for.
The last idea for a wealth tax is an expatriation tax applied to those who renounce U.S. citizenship. I am not sure this represents a huge revenue opportunity.
Most of the time, a wealth tax is presented either as a direct or indirect solution to wealth inequality. At the very least, it is presented as an alternative to wealth inequality. But what is wealth inequality? Equality and inequality suggest two sides of an equation. In the case of inequality, one side of the equation has more, the other side has less. The problem is, taxing those with large amounts of wealth only addresses one side of the equation, and it addresses the less urgent one. It is those without wealth who are believed to be the victims of inequality.
Interestingly, Bershidsky column presents the single biggest argument against a wealth tax: The open-ended nature of what to do with the proceeds. He speaks of "clean energy subsidies" and "useful government programs". What makes these more worthy? Why not use the proceeds from a wealth tax to recapitalize the military? Fund higher education? Or 1,000 other pet projects? One can see the obvious problem with this. It is to politicians what the Sears Wish Book was to children of my generation, or what lottery winnings are hoped for for some.
This raises a more important question: What is wealth? To put it simply, wealth is savings and investments. Wealth is a form of deferred income. How is wealth created? Msot often, it starts with some form of income. Ordinary income saved. Income from a gift or a sale of something. What is wealth used for? Usually, the intent of wealth is to use it in the future as a form of cash flow, or income, if you will. To use wealth, one has to liquidate it and turn it back into cash. What is the most common form of wealth today, and where is it? Most wealth today is directly or indirectly owned by the upper middle class, if the form of capital stock, most often in retirement accounts or in insurance reserves backing up life and property policies owned by those in the upper middle class, or in the pension reserves of middle class pensioners.
What is the intended use for most wealth? Given most of the wealth is in retirement savings and pension funds, the obvious use for wealth is for retirement income, along with insurance to provide financial protection in the case of a lost home or life.
What are the downsides of not having this kind of wealth? What do those in the lower class and lower middle class not have due to their lack of wealth? First, they face financial insecurity in old age, either in the form of underfunded retirement, a lack of ability to purchase supplemental health insurance, and perhaps a need to work far into old age. It also means a likely lack of life insurance in middle age.
So treating the effects of wealth inequality means treating the above. Not with "clean energy subsidies" but with things like addressing the underfunded Social Security and Medicare trust funds. Perhaps increasing Social Security payments for those at the bottom of the Social Security scale. Perhaps broadening Medicare coverage to better handle things like the Medicare Part D "doughnut hole" and to better support Medicaid funding of long-term care. It also means funding SSI and Medicaid for those aged who do not qualify for Social Security and Medicare.
Those would be a moral use for the proceeds of a wealth tax. The only moral use case I can think of. It would directly address wealth inequality, because it would directly address the effects of wealth inequality.
Now what to tax? I personally believe our current tax system is deeply immoral. I do support taxing capital gains at the ordinary income rate. I can support an estate tax with a very generous exemption ($5-10 million), a very graduated scale (starting at about 10%), and a very reasonable top-end rate limit--more like 40% instead of Piketty's insane 90%. One can make the argument the estate tax is simply a form of capital gains tax, since the gains are not yet realized. The idea of the estate tax being earmarked to the Social Security and Medicare trust funds makes considerable sense, and it keeps the politicians hands off of the proceeds for their pet projects.
There are better alternatives to Social Security, and better ways to fund Social Security and Medicare. But they are beyond the scope of this post.
