Evan Soltas
Mar 4, 2013

Why We Don't Tax Wealth

Ashok Rao, a new blogger on the economics circuit, has a post up calling for a yearly wealth tax. This is an area economics has looked at rather extensively. The verdict, as far as I can tell, goes pretty strongly against such a tax.

Here are several arguments I find compelling against direct wealth taxation:

(1) Incentivizing individuals to shift consumption around in terms of time is inefficient; that is, a small wealth tax will create a large disincentive against saving and investment.

(2) Very little wealth is in liquid assets, and liquidation is costly.

(3) Wealth is probably easier to conceal than income, decreasing compliance or increasing enforcement costs.

(4) In the U.S., a constitutional amendment would be required.

(5) A national wealth tax of any size would create considerable global coordination problems.

Many economists favor moving in the opposite direction, such as towards a Hall-Rabushka consumption tax. Note, also, that the effective tax rate on wealth is already nonzero as a result of local property taxes, the capital gains tax, the estate tax, and the gift tax.