I have no issues with income / wealth inequality, per se. But I have some issues as to why that inequality happens. Some important rationales are the following:
A) Taxing high income will cause capital / investment flight.
B) Wealth trickles down.
A: could be true, but it does not warrant letting private investors take all profits without incurring in the necessary expenses, which are currently funded by the tax payer (disproportionately low-medium income workers), or simply not covered (health care).
B: This is, after several decades of lying to the electorate, patently false.
The real problem though isn't wealth inequality, it's income inequality. If someone has a billion dollars that's invested in various stocks, and never tries to withdraw that money, leave him alone. The day he decides to sell his investments and start buying private jets, that's the time to tax him on his income.
The argument against a wealth tax, is that it penalizes savers, and rewards spenders. Which is not what we want as a society. It's better for both the individual and for society if people invested their money into productive enterprises, instead of spending it on luxury goods.
If the goal is to provide a more egalitarian quality of life across society, this can be perfectly achieved through an income tax alone. Specifically, by treating capital gains the same way as salaries, and by increasing the marginal tax rates for high earners.
Wealth is not income though. Higher wealth taxes would go a long way but then you again have the problem of the wealthy simply moving their wealth out or not bringing it to the high-tax country in the first place.
Think of income taxes as regulatory capture by those who already have money. The higher the taxes, the greater wealth inequality becomes. Once you have a lot of wealth, you can afford to stop and start new efforts at getting income, while everyone else is stuck taking a salary (and if they're lucky, stock / 401ks). That flexibility lets them stay ahead of the tax laws that keep everyone else down.
That's a real problem. Wealth and income are radically different numbers for people at the top end. High income taxes end up punishing the upper middle class instead of the truly wealthy who own assets.
The majority of income the top 0.1% make is from investments and gets taxed as capital gains, only about 15% of their income is taxed as ordinary income. [2][3]
We have an economic system where it's dramatically easier to make money the more money you already have. If you have $50M, you can park it in an index fund to get 4% returns and make $2M every year just off of your investment returns (which then gets taxed at 15% instead of 35% for ordinary income). If you don't spend all of that $2M, you'll continue to make more money just by having more money.
By taxing income instead of wealth, we're also essentially penalizing labor and rewarding wealth. We shouldn't penalize something that actually contributes to the economy and instead ask people who have more (not earn more necessarily) to contribute via taxes.
Let's not conflate wealth with income. Generally, you get income by providing a service to the market in excess of that income (as perceived by the market, which can be wrong).
If you have really high taxes, the only way to get rich is to be born rich.
High estate taxes make a ton of sense from a social perspective. High income taxes, much less so.
I don't have a big problem with income inequality, compared to wealth inequality (averaged over a long time). Consumption taxes and "death tax" (or at least a strong social convention toward donating assets in excess of a certain level, rather than heirs inheriting them) would go a long way. Income inequality is largely due to differences in economic contribution, and encouraging people at the far right of the power curve to do more (and be more numerous) produces positive externalities.
The main quick fixes to the tax code which I'd like to see are immediately taxing carry as income, getting rid of deductions for employer health insurance and mortgage interest, and a national sales tax or VAT (ie consumption tax), ideally highly progressive or exempting the first 50k/yr or something. Then, look at lowering income tax rates to something like 25% flat and setting lt capital gains and dividends at slightly less (20%) or the same as income but indexed for inflation. Get rid of the AMT, and maybe lower corporate rates to try to get firms to repatriate more and avoid abusive tax structuring like the double Irish sandwich and such.
A more transparent tax code, even if revenue neutral, would boost economic activity. A more transparent tax code, taxing things with negative externalities and not discouraging positive externalities, raising more income while cutting expenditures greatly, would be even better.
Not that there is much chance of any of this happening.
This is brought up again and again. You can make similar arguments for every tax. In fact let's look at income tax. The money people spend on income tax they could spend on.
1. Spent on goods or services
2. Spent on rent
3. Spent on capital purchases
4. Spent on debt repayment or other forms of financing
In fact income tax does not have the last two points that you admit are bad, so maybe we should eliminate income tax and use corporate tax only?
The thing is low corporate taxes create an inequality between labor and capital gains. It's already the case that wealth inequality is quite unrelated to income inequality, the highest wealth individuals often don't register in the high income brackets.
I don't see why. There's a huge body of work that shows that taxing wealth versus capital income is likely to increase productvity while reducing income inequality, which is a hug source of our current economic problems and polarization: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3454385. Two MIT economists just won a Nobel prize for showing the benefits not just in a developed economy but globally.
I feel the wealth inequality issue needs to be addressed. My only problem with the wealth tax is that it takes money from the wealthy and feeds it to the government. I am having a hard time connecting how that improves the situation of the lower and middle classes.
Along the points you bring up, John Cochrane had a fantastic series about why wealth taxes are such a terribly economic inefficient mechanism to raise revenue and why virtually no economists support them.
Very few people get rich off wages, and those that do pay 40-50 percent tax for the privilege. It's ownership of assets, largely tax free, and propped up by government policy, that drives inequality.
Taxes on the wealthy are at historic lows and wealth inequality at historic highs at a time when we have many important but underfunded programs that would benefit all of us. What's the argument against it? That it isn't "fair"? That rich people will stop trying to earn more money? I don't find that to be credible.
I don't disagree, but the wealth disparity is different than the income disparity. On the one hand, a wealth disparity can be directly passed down, and repealing the estate tax will only deepen this trend. On the other hand, reducing income inequality may help with the here-and-now, helping families to BUILD wealth while not also living paycheck to paycheck. So, IMO, we should tackle both income inequality via progressive taxation, and we should tackle wealth inequality by instating a much stronger estate tax that prevents a landed gentry, a permanently wealthy and insulated class of millionaires and trust fund babies.
There is also something to be said for personal choices of the non-wealthy. I see many in my lower-middle class city with new luxury BMW or Benz ($30-50k) vehicles, who are living in $120k condo units. I see many people with shiny massively spec'd out trucks that they never used to haul anything and just park at their office job. What would the country look like if average people saved more and invested some of their lifestyle splurging?
So, while the tax structure and skill gaps are big, we can also say consumers need to be much smarter and more modest if they want to build wealth and improve their station.
Wealth/income inequality is addressed by wealth/income taxes, or marginal consumption taxes. Controlling prices (limiting wages) would be a terrible way to go about it.
there’s nothing about inequality that should mean that we’re collecting a lower percentage of GDP in taxes. There are lots of reasons outside of tax policy that wealth may accumulate.
A) Taxing high income will cause capital / investment flight.
B) Wealth trickles down.
A: could be true, but it does not warrant letting private investors take all profits without incurring in the necessary expenses, which are currently funded by the tax payer (disproportionately low-medium income workers), or simply not covered (health care).
B: This is, after several decades of lying to the electorate, patently false.
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