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Replace Income tax with Wealth tax!

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By sonofed
November 6, 2003

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Except that a guy sitting on $10,000,000 slowly cashing out capital gains from it is paying much less tax on the same amount of income as I, with no net worth and actually working for my income, am. How is that fairer?
I wasn't addressing the concept of fairness. If you want to discuss fairness, then a flat tax is the only true fair tax. Progressive taxation is far from "fair" in any normal definition of the word .

I was addressing the impact of free riding in a democratic society. If you focus the cost of society on the top 20% of society, the remaining 80% have an incentive to vote themselves all sorts of entitlements since their cost for those programs is virtually zero. The result is an upward spiral in government spending that eventually becomes unaffordable.

You mentioned the fact that the current tax system is skewed heavily towards burdening the top 20%. I would counter that it is this very skew that is resulting in the absurd current levels of government spending. You don't even need to dig very deep to see that its true. How many Democratic candidates for President have talked about raising taxes on the "rich" to pay for any number of benefits popular to the masses? If you answered "all of them", move to the head of the class.

It is not at all clear to me, that the NET effect here would be to reduce investment. You would have all these people WANTING to spend their incomes more than they used to, so you would have DEMAND driven increases in investment in an attempt to harvest that extra consumption. Sounds like it might be a wash to me.

It's a question of capital formation. A wealth tax would attack any accumulation of capital. It takes capital for businesses to expand to meet demand. If you inhibit capital formation, you inhibit business growth. Then all the excess demand you've created simply translates into higher prices and less effective supply. It's not a good thing.

That's not to say that additional supply wouldn't be created, just that it would be created at a much slower rate. I doubt it would be a wash.

I think the result would be that the money people save by not paying income taxes would immediately be spent paying more for the same things they used to buy for less.

Property tax levels would likely be at 1/10 the income tax levels, and we could certainly code that into the enabling amendment.

So you're suggesting property taxes would run at around 4% of net wealth? That seems awfully high. You think Bill Gates should pay $2,000,000,000 in taxes each year? Do you think he really gets $2,000,000,000 worth of benefit from our society? Don't you think that would provide him with a pretty strong incentive to move to Vancouver?

Does society benefit from providing strong incentives for our wealthiest citizens to leave? I don't think so.

First of all, my Income tax filing runs to 40 pages, and I am NOT particularly rich. I'm sure on reflecting on your own experiences with determining your income taxes, you will retract that part of your argument quickly!

And why is that? It clearly isn't become income is difficult to define. Tax filings run into volumes because government uses the tax system to [encourage] certain behaviors.

We want you to own a house, so we make mortgage interest deductible.

We want you to own stocks, but to hold them for the long term, so we'll charge you 20% for some sales and 40% for others.

We want you to own a business, so we'll make small business expenses deductible.

Take away the government social meddling and the tax code become much simpler: You made X, please pay me Y.

Second, wealth is not particularly amorphous, and we would have options on how we define it for tax purposes anyway. We already have tax code addressing valuation of assets for the purposes of figuring business taxes (and self-employment and real estate income taxes for individuals.) This is all well worked out and no wheels need be reinvented. Schedules of different classes of assets have different depreciation rates. Things could be valued on their most recent purchase price, so that the wealth tax you pay on stock would depend on what price you bought it for rather than on its current value...

Wealth is extremely amorphous. Let's consider what you're suggesting. Say I buy a house this year for $100,000. I would pay property tax on that house at the $100,000 level forever until I sold it, even if property values went wildly up or wildly down.

Consider the first case - housing prices going wildly up. So now, I can go get my house appraised for $300,000 and take out a mortgage for $200,000. From the government's perspective, I have an asset worth $100,000 and debt totaling $200,000. Viola!! No wealth and hence no tax.

So of course, the government isn't going to let that happen, are they? Nope, they will have to come around periodically and tell me what they think my house is actually worth (like they do now for property taxes). Since the housing market is not really all that fluid, the price set [will] necessarily be arbitrary.

Consider the second case - housing prices go way down. So now, I have a house I paid $100,000 for that is suddenly only worth $50,000. Since it is on the books for $100,000, I am essentially going to pay double the tax rate as everyone else. Is that fair? Is the government really going to come along and re-assess the house downwards to give me a tax break? They may, but again the process would be completely arbitrary.

The markets for many types of hard assets are not liquid. Individual commodities in many of these markets are often unique, which prevents the market from setting a definitive price for the asset. The best you can do is make an educated guess. That doesn't sound like the basis for a fair tax system to me.

My real interest and purpose here is to expand our consciousness. We have accepted at a very basic level the idea that taxing income is "right" with people arguing around the edges over whether it should be at a progressive rate or a flat tax rate.

Is taxing income right? I don't know that that is framing the discussion correctly. There are any number of ways to skin this cat depending on what your final objectives might be. On the surface, since most people have an income and many more have an income than have a net wealth, it seems a logical way to apportion the operating expenses of the country.

Furthermore, it has the advantage that people who make less, pay less, and that taxes are collected based on current market conditions. That is a tremendous advantage to my way of thinking. If I have a bunch of assets under the current system, but lose my job, the majority of my tax burden goes away. Under a wealth tax, I would have the same burden at a time when I was least able to afford it. This market responsiveness is one of the greatest strengths of taxation based on income.

Additionally, income tax doesn't have the capital destroying effects of a wealth tax, and it doesn't have the economic impact of high import duties.

So far as taxes are necessary to support government, it seems that income taxation is the most efficient way to do it. The conclusion that income taxation is the most market responsive taxation method pushes us to tinkering at the margins of whether a progressive tax or flat tax is more fair and what rate is most appropriate.

But why morally does that make any sense at all? On the one hand, a head tax makes sense; we all have our lives, why not pay "rent" as our portion for living here. At the other end of the spectrum, a property tax makes sense for the reasons I outlined in my previous response: a tremendous amount of government services protect property, and a property tax amounts to a more reasonable way of making tax look like a "fee."

A head tax is a nice idea, but again it is not responsive to market conditions. What if I lose my job and can't pay the head tax? Do you arrest me because I endured economic hard times?

As far as government protecting property, I agree that I benefit more from military protection of our borders than the guy living out of a cardboard box in Hartford. I'm even willing to pay more for it, provided if it ever comes down to an actual invasion, the 82nd Airborne forms a tight perimeter around my house (and perhaps even neighborhood) and lets the marauding Canadians (yes, Michael, I mean you...) trample over the other guy's cardboard box.

Since that isn't likely to happen, the whole "pay more because you own more" thing doesn't work for me.

Last year, I paid 17 times the national average in total taxes. The police don't come to my house 17 times more often; The fire department doesn't come to my house 17 times faster; My kids wouldn't get 17 times more education than the average; I don't get 17 votes.

Tell me again how I am benefiting more from the services society offers because I have more?

I think that argument fails to hold water.

So I have to hold my ground on this point. Wealth taxes are a bad idea for all the ideas I already mentioned. Income taxes, while the current system is not my preference, do offer the most market responsive tax system and hence provide a built in fairness that other systems lack.


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