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Doesn't a wealth tax encourage immediate consumption? And how do you measure wealth? Would the government hire thousands of wealth assessers to value old houses

Doesn't a wealth tax encourage immediate consumption? And how do you measure wealth? Would the government hire thousands of wealth assessers to value old houses and cars and furniture? I've always thought that economists consider a consumption tax the ideal tax.

leot 13y ago
Lots of economists like wealth taxes, too, though talking about them to wealthy people often goes over poorly. A wealth tax encourages putting assets to work rather than simply engaging in "wealth preservation". Replacing most tax revenue with a wealth tax + a VAT (a consumption tax) ensures that everyone contributes fairly, and offsets the "immediate consumption" incentives.
- harryh 13y ago
  Lots of economists like wealth taxes, too. <--- Can you cite some of them please?
  - leot 13y ago
    http://www.economist.com/blogs/freeexchange/2013/06/property-taxes http://www.economist.com/blogs/freeexchange/2013/06/property... http://www.econ.nyu.edu/user/wolffe/ http://www.econ.nyu.edu/user/wolffe/
  - mjn 13y ago
    There's a huge literature on optimal tax policies, usually focused on more specific questions, so I'm not aware of a good survey paper on what economists think of wealth taxes generally. However, two specific questions you could look into, each of which have significant supporters on both sides: 1. What are the relative merits of inheritance taxes and wealth taxes, from the perspective of economic efficiency and/or intergenerational egalitarianism? 2. What are the relative merits of wealth taxes vs. capital-gains taxes? Roughly, is it preferable to tax capital annually based on its current value, or to tax realized gains in capital at the time of realization? The current real-world situation is that inheritance and capital-gains taxes are fairly common, while wealth taxes are uncommon, and there's some disagreement over whether that is the right choice.
- yummyfajitas 13y ago
  How does adding a VAT to a wealth tax offset the immediate consumption incentives? Either way, you are taxed when you spend the money. Additionally, if you don't consume immediately, you are taxed some more. Hence, immediate consumption incentives.
  - leot 13y ago
    VAT rate is a tunable parameter in a tax system. It could, in principle, be set high enough to discourage all consumption (which would of course not be desirable). This implies that there is some rate that it could be set to that would offset any added consumption incentive caused by wealth taxation (assuming such an incentive exists, which I think might not actually be the case under most wealth tax schemes). Indeed, whether there is an immediate consumption incentive or not depends on how good someone is at investing. If the person is able to generate a return far in excess of the periodic wealth tax, that person has no added incentive to spend whatsoever (spending would decrease future income and wealth). If the person isn't a particularly good investor, then spending becomes more attractive. Which seems to me exactly like the outcome we want. Furthermore, a wealth tax tends to hit most those individuals who as a group already spend a much smaller proportion of their income (the highest earners tend to save the most). Indeed, since most middle- and low-income earners would only be taxed on their consumption, such a tax scheme would incentivize those with little to increase their rate of saving.
    - yummyfajitas 13y ago
      Without a VAT tax but with a wealth tax, $10 can buy 10 sandwiches today or 8 sandwiches in the future. If you add a VAT, $10 can buy 8 sandwiches today or 6.4 sandwiches in the future. Either way, better to consume today than tomorrow. This applies to the wealthy and middle class alike. A wealth tax discourages productive investments since it reduces all rates of return. In particular, it reduces marginal rates of return below zero, discouraging productive investments. Say I can buy 10 sandwiches today, or build a machine which will give me 11 sandwiches tomorrow. If your wealth tax is 20%, it's better for me to consume 10 sandwiches today than 8.8 sandwiches tomorrow. Seriously, just crunch the numbers. It's not hard.
mjn 13y ago
For a wealth tax on smallish amounts of wealth, I agree those are problems. But a wealth tax is usually contemplated as being on large fortunes. That removes the need to worry about the valuations of small stuff. And it also makes encouraging spending rather than accumulation a feature rather than a bug: one purpose of a wealth tax on large fortunes is to prevent large fortunes from accumulating and being maintained indefinitely, i.e. to prevent the emergence of a kind of aristocracy. Thomas Paine proposed an early version of a wealth tax for that reason. His version was something of a hybrid between an inheritance tax and a wealth tax: it was an annual assessment on the current value of inherited estates. That has some conceptual advantages: unlike a straight wealth tax it exempts self-made fortunes for the lifetime of their maker, and unlike a straight inheritance tax it doesn't happen all at once as a single lump sum (which can be problematic for inheritance of hard-to-divide things as well as easier to dodge with instruments like generation-skipping trust funds). But in a modern context it has some administrative disadvantages, because it requires long-term tracking which portion of one's net worth is inherited vs. not.

leot 13y ago

Lots of economists like wealth taxes, too, though talking about them to wealthy people often goes over poorly. A wealth tax encourages putting assets to work rather than simply engaging in "wealth preservation". Replacing most tax revenue with a wealth tax + a VAT (a consumption tax) ensures that everyone contributes fairly, and offsets the "immediate consumption" incentives.

harryh 13y ago
Lots of economists like wealth taxes, too. <--- Can you cite some of them please?
- leot 13y ago
  http://www.economist.com/blogs/freeexchange/2013/06/property-taxes http://www.economist.com/blogs/freeexchange/2013/06/property... http://www.econ.nyu.edu/user/wolffe/ http://www.econ.nyu.edu/user/wolffe/
- mjn 13y ago
  There's a huge literature on optimal tax policies, usually focused on more specific questions, so I'm not aware of a good survey paper on what economists think of wealth taxes generally. However, two specific questions you could look into, each of which have significant supporters on both sides: 1. What are the relative merits of inheritance taxes and wealth taxes, from the perspective of economic efficiency and/or intergenerational egalitarianism? 2. What are the relative merits of wealth taxes vs. capital-gains taxes? Roughly, is it preferable to tax capital annually based on its current value, or to tax realized gains in capital at the time of realization? The current real-world situation is that inheritance and capital-gains taxes are fairly common, while wealth taxes are uncommon, and there's some disagreement over whether that is the right choice.
yummyfajitas 13y ago
How does adding a VAT to a wealth tax offset the immediate consumption incentives? Either way, you are taxed when you spend the money. Additionally, if you don't consume immediately, you are taxed some more. Hence, immediate consumption incentives.
- leot 13y ago
  VAT rate is a tunable parameter in a tax system. It could, in principle, be set high enough to discourage all consumption (which would of course not be desirable). This implies that there is some rate that it could be set to that would offset any added consumption incentive caused by wealth taxation (assuming such an incentive exists, which I think might not actually be the case under most wealth tax schemes). Indeed, whether there is an immediate consumption incentive or not depends on how good someone is at investing. If the person is able to generate a return far in excess of the periodic wealth tax, that person has no added incentive to spend whatsoever (spending would decrease future income and wealth). If the person isn't a particularly good investor, then spending becomes more attractive. Which seems to me exactly like the outcome we want. Furthermore, a wealth tax tends to hit most those individuals who as a group already spend a much smaller proportion of their income (the highest earners tend to save the most). Indeed, since most middle- and low-income earners would only be taxed on their consumption, such a tax scheme would incentivize those with little to increase their rate of saving.
  - yummyfajitas 13y ago
    Without a VAT tax but with a wealth tax, $10 can buy 10 sandwiches today or 8 sandwiches in the future. If you add a VAT, $10 can buy 8 sandwiches today or 6.4 sandwiches in the future. Either way, better to consume today than tomorrow. This applies to the wealthy and middle class alike. A wealth tax discourages productive investments since it reduces all rates of return. In particular, it reduces marginal rates of return below zero, discouraging productive investments. Say I can buy 10 sandwiches today, or build a machine which will give me 11 sandwiches tomorrow. If your wealth tax is 20%, it's better for me to consume 10 sandwiches today than 8.8 sandwiches tomorrow. Seriously, just crunch the numbers. It's not hard.

mjn 13y ago

For a wealth tax on smallish amounts of wealth, I agree those are problems. But a wealth tax is usually contemplated as being on large fortunes. That removes the need to worry about the valuations of small stuff. And it also makes encouraging spending rather than accumulation a feature rather than a bug: one purpose of a wealth tax on large fortunes is to prevent large fortunes from accumulating and being maintained indefinitely, i.e. to prevent the emergence of a kind of aristocracy. Thomas Paine proposed an early version of a wealth tax for that reason. His version was something of a hybrid between an inheritance tax and a wealth tax: it was an annual assessment on the current value of inherited estates. That has some conceptual advantages: unlike a straight wealth tax it exempts self-made fortunes for the lifetime of their maker, and unlike a straight inheritance tax it doesn't happen all at once as a single lump sum (which can be problematic for inheritance of hard-to-divide things as well as easier to dodge with instruments like generation-skipping trust funds). But in a modern context it has some administrative disadvantages, because it requires long-term tracking which portion of one's net worth is inherited vs. not.