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A wealth tax can alleviate the ill effects of inequality in the United States

A wealth tax can alleviate the ill effects of inequality in the United States

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Amitrajeet A. Batabyal
Amitrajeet A. Batabyal

Let us begin with four stylized facts. First, the portion of national income that goes to paying the wages of workers has been declining in the last four decades in most western nations. Second, even when we restrict attention to just the earnings of labor, these earnings themselves have become more unequal over time. Third, the journalist Martin Sandbu points out that although income inequality relative to the 1980s has now stabilized, throughout the boom in the 2000s, the highest earners in the U.S. have continued to pull away from the rest. Finally, the economists Emmanuel Saez and Gabriel Zucman have shown convincingly that there has been a dramatic rise in the concentration of wealth in the U.S.

The key point to grasp from the above four facts is that even though income inequality has somewhat stabilized, the fact that it is now higher than what it used to be in the immediate aftermath of World War II means that it continues to help concentrate wealth over time in the hands of an ever-smaller number of individuals.

We can use tax policy to make economic life for all Americans more equitable and, in the process, address the plight of workers who have been, in the words of Martin Sandbu, “left behind” and whose misery now frequently leads to what the economists Anne Case and Angus Deaton have called “deaths of despair.” One of the best ways to do this is to tax wealth directly. A net wealth tax is an annual levy that is assessed as a percentage on taxpayers’ total net worth, that is, the total value of all their assets less the total value of all their debts.

Net wealth taxes have become a topic of public conversation in the U.S. in 2020 because Sens. Bernie Sanders and Elizabeth Warren both proposed their own versions of such a tax when running for president. In addition, in their tax proposals, both senators utilized a bedrock principle that appeals to egalitarians: The burden of a tax ought to be borne by those who are best equipped to deal with this burden.

To see how the above principle might work in practice, suppose that a wealth tax applies only to the amount of net wealth that puts a person in the wealthiest 10 percent of families. This means that 90 percent of the population pays no tax at all. This kind of a wealth tax makes sense because in most western nations, wealth is concentrated in such a way that the taxable portion of private wealth is double, or more than double, the value of national income. So, as Martin Sandbu has pointed out, an efficiently levied net wealth tax at the rate of 2 percent per annum can raise revenue that is equal to 4-5 percent of national income. This is a very large amount of revenue and hence it can be used to lower other taxes, finance public spending, and, importantly, reform extant welfare and labor market policies so that these markets work better for those left behind by, for instance, trade competition with China or globalization more generally.

Net wealth taxes have other advantages as well. One key advantage is that it is arguably the least harmful way of taxing capital because it is likely to promote rising productivity. This is because a net wealth tax influences how savings are invested. So a fortune of $10 million leads to the same tax payment whether it takes the form of a high-yielding business or a luxury yacht whose value depreciates over time. Put differently, a net wealth tax penalizes low-yielding investments in favor of high-yielding ones. In this way, a net wealth tax encourages risk-taking by competent entrepreneurs.

For a net wealth tax to work properly, it needs to be administered well and, more importantly, it needs to have a comprehensive base that includes all asset classes. Saez and Zucman are certainly right when they point out that the greatest risk to the enforcement of a net wealth tax comes from an erosion of the tax base due to the exemption of particular assets. Exemptions of this sort permit the wealthy to avoid the tax by converting a part of their wealth into non-taxable assets. This lowers tax revenue. The available evidence shows that tax-base erosion tends to occur when specific constituencies lobby effectively to seek one or more exemptions.

A well-enforced net wealth tax will reduce the concentration of wealth. This is because if the very rich have to pay a percentage of their wealth in taxes each year, then it makes it harder for them to maintain their wealth. In addition, the riches of individuals subject to a net wealth tax are expected to rise less quickly after the introduction of the net wealth tax than before. This is a goal that egalitarian-minded Americans ought to be willing to endorse.

Batabyal is the Arthur J. Gosnell professor of economics at the Rochester Institute of Technology but these views are his own.