5 ms·

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 r

by 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.
    - leot 13y ago
      Perhaps something hasn't been made clear. I'm not sure why you seem to have adopted a condescending tone. A wealth tax is typically a periodic (monthly/quarterly/yearly) tax on total net worth. This tax often ranges between 0 and 3% yearly, often with with highest rates only applying to wealth above a certain amount. What I think might have been left out from your example is the fact that the person isn't choosing just between spending and not spending. They are choosing between spending and saving/investing. The arithmetic is simple. If I can generate a 7% return on my assets, and I'm being taxed yearly at 1% of my assets, then the way for me to make the most money is to have the most assets. The return I get yearly is 7% - 1% = 6%. If one year I have $120 and I spend $20 of it, then I make $6 that year. If don't spend any, I make $7.20 that year. EDIT: Re "... discouraging productive investments". This statement might be true for capital gains taxation, but it isn't so for wealth taxation. If I invest extremely conservatively (e.g. in precious metals) then I might only manage a 3% return. A 1% wealth tax would then amount to a 33% capital gains tax. If I invest aggressively and successfully, then I might earn 10% that year. Then the 1% would be equivalent to only a 10% capital gains tax. As such, a wealth tax is the only tax that actually encourages productive investment and discourages hoarding.

by leot 13y ago

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.
  - leot 13y ago
    Perhaps something hasn't been made clear. I'm not sure why you seem to have adopted a condescending tone. A wealth tax is typically a periodic (monthly/quarterly/yearly) tax on total net worth. This tax often ranges between 0 and 3% yearly, often with with highest rates only applying to wealth above a certain amount. What I think might have been left out from your example is the fact that the person isn't choosing just between spending and not spending. They are choosing between spending and saving/investing. The arithmetic is simple. If I can generate a 7% return on my assets, and I'm being taxed yearly at 1% of my assets, then the way for me to make the most money is to have the most assets. The return I get yearly is 7% - 1% = 6%. If one year I have $120 and I spend $20 of it, then I make $6 that year. If don't spend any, I make $7.20 that year. EDIT: Re "... discouraging productive investments". This statement might be true for capital gains taxation, but it isn't so for wealth taxation. If I invest extremely conservatively (e.g. in precious metals) then I might only manage a 3% return. A 1% wealth tax would then amount to a 33% capital gains tax. If I invest aggressively and successfully, then I might earn 10% that year. Then the 1% would be equivalent to only a 10% capital gains tax. As such, a wealth tax is the only tax that actually encourages productive investment and discourages hoarding.