Tax capital gains more– not wealth

Yeah, wealth taxes sound great in theory, but, in practice, not so much.  Long-time critic of our policy regime that has led to so much wealth inequality, Tim Noah makes the strong case that we need to do much better taxing capital gains and that a wealth tax is a fool’s errand:

Why do I make such a fuss about the distinction between taxing capital income on the one hand and taxing wealth on the other? Because it muddies the central problem, which is that taxes on capital and business income have been eviscerated over the past generation to the point where, starting in 2018, the effective tax rate on capital income fell below the effective tax rate on labor income, according to Berkeley economists Emmanuel Saez and Gabriel Zucman. The immediate culprit was Trump’s sharp cut in corporate and estate taxes in 2017, but, as Saez and Zucman demonstrated in their 2019 book, The Triumph of Injustice, for two decades previously, both parties had been whittling away at taxes on capital, starting with President Bill Clinton’s lowering of the top capital gains rate in 1997 from 28 percent to 20 percent. (Biden proposes raising the top capital gains rate to 39.6 percent; the House Democrats propose raising it to a paltry 25 percent.) “Capital income,” Saez and Zucman wrote, “is becoming tax-free.”

That’s a calamity. But fixing it with wealth taxes would be a fool’s errand. For starters, the United States doesn’t have any wealth taxes at the national level, so you’d have to create an entirely new tax. Doing so, as Treasury Secretary Janet Yellen noted in a February New York Times interview, would pose “very difficult implementation problems.”  

Wealth taxes haven’t worked very well in Europe. A 2018 report by the Organization for Economic Cooperation and Development found that the number of OECD countries with wealth taxes dwindled after 1990 from 12 to four because wealth taxes were “more distortive and less equitable” than taxes on capital income and estate taxes. Revenues from wealth taxes in the four countries that kept them were surprisingly low, accounting, in 2016, for 0.5 percent of total revenues in France and Spain and 1.1 and 3.7 percent, respectively, in Norway and Switzerland…

But in the U.S., most of our largest fortunes are built on income, not wealth. The growth in U.S. wealth inequality over the past three decades has resulted less from Rockefellers and Waltons accruing interest on family capital than from corporate CEOs and financial buccaneers being grossly overcompensated for their labor. Income is still where our economy lives, as it has since the Industrial Revolution mooted farm acreage as the measure of financial well-being.

By all means, tax those Rockefellers and Waltons when they die. But while they live, it’s a lot simpler to tax people’s income. There’s absolutely no reason we can’t tax the wealthier among them a whole lot more, as the Biden administration seeks to do.

About Steve Greene
Professor of Political Science at NC State

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