The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Taxing Wealth ?

10/25/2019

Classical economists teach “If you want more of something, subsidize it.  If you want less of something, tax it.”  Theoretically, if you subsidize something, the price will drop and customers will buy more.  If you tax something, it costs more and customers will buy less.  Does that mean, if you tax wealth, you’ll have less of it?

At least three of the Democratic candidates have proposed a wealth tax.  Instead of just taxing income, they propose taxing wealth.  This is not new and has been debated for decades already.  Anyway, Senator Wyden’s plan calls for annual estimates of “wealth” and payment of taxes on the annual increase.  Senator Warren’s plan is more directly targeted at the most wealthy but essentially the same.  Vice President Biden’s plan is based on the current estate taxation framework.  Assets are valued once — at death and the capital gain is taxed at ordinary income rates. Which plan is best for the budget deficit depends on many assumptions, especially rates.

Taxing wealth is a great idea that works well in theory but not in practice.  How much is grandma’s oil painting worth?  How about some farm land in another county?  What about your coin collection?  Do you need to pay for appraisals of every asset every year?  So, how about taxing negotiable stocks and bonds instead?

Financial economists teach “Money goes where it is most appreciated.”  If I pay taxes on my stock portfolio but not on my real estate portfolio, I will suddenly get very interested in real estate and lose interest in stocks.  Changes in tax policy can easily change investment behavior.  For example, charging ordinary income tax rates on corporate bonds pushed billions of dollars into tax-free municipal bonds.  Money flows!  The reason we tax income so heavily is that it is easier to compute.

Of the three plans, I think Biden’s is the least burdensome and the most likely to get through Congress.  Of course, I’m sure the details will be devilish enough to keep lawyers busy for years.

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