Why is a wealth tax a bad idea? It tries to make the wealth pie more equal, but we need policy that focuses on making the entire pie bigger. This would improve the economy – speed up innovation – and grow the total tax base. Going one step further, new policy should focus on improving current tax dollar spending. There’s a lot of bureaucracy and waste that could instead be put to creating more equal opportunities.
With a hot campaign trail, wealth tax is hitting more news feeds. I’ll show you research on the widening wealth gap below. But with the points you’re about to see, a wealth tax isn’t a good solution. Unfortunately, politicians are using the idea to buy votes.
Why a Wealth Tax is a Bad Idea
1. Disincentivizes Saving Money
A wealth tax would disincentivize saving money. Building wealth is part of the American dream. But the government taxes you at nearly every step. Income, sales, property, inflation (indirect), and death taxes already take a big bite out of your potential wealth. And a wealth tax would slowly eat away what’s left over… every single year.
Measuring total wealth is more challenging than measuring income. When you earn a paycheck, you know exactly what it’s worth. But if you own valuable family heirlooms or a private business, it’s hard to measure. If valuing a business was easy, we wouldn’t have an active stock market. This alone would make implementing a wealth tax near impossible. One more example, some inventors own valuable patents. These and other hard-to-value, intangible assets are growing in our tech driven world.
3. Government Oversight
The IRS would come up with thousands of pages of new rules to measure total wealth and enforce the new laws. That would be convoluted and expensive. Then ongoing audits would add a whole new level of government surveillance. As mentioned, it’s much easier to measure income. But with a wealth tax, Uncle Sam would need to know about everything you have stashed away.
4. Cash Flow
If all of your savings are tied up in a business, it makes it hard to pay wealth taxes. This is the case with many small business owners. Let’s say an entrepreneur has worked hard and taken a great risk. He has turned his life savings of $100,000 into a $100 million business. But this person is still in the early stages and the profit margin is small. For perspective, there are multi-billion-dollar companies that still operate at a loss like Uber.
The only amount taken out is to meet minimum living expenses. The rest is reinvested in the business’s employees and growth… but if a small 1% wealth tax is applied, he will have to come up with an extra $1 million (after adjusting for other taxes). This would limit the business owner’s ability to hire new employees and grow the business.
5. Limits Power of Free Markets
Investment comes from savings and if the wealthy can’t save, they won’t invest. Investors tend to move their money where it is treated best. Sure, capitalism has its problems – like monopoly power and tragedy of the commons – but it’s one of the most productive systems we’ve had throughout history.
With current government intervention, one of the biggest problems is that a good chunk of taxpayer dollars is wasted on low-ROI programs. There’s an old saying that goes like this, the closest thing to eternal life is a government program. Governments are monopolies and their inefficiencies can last much longer than a private business. For more insight, you can check out my article on why socialism is great in theory but terrible in practice.
6. Wealth Tax Failed
With history as a guide, we know a wealth tax doesn’t work well. In 1990, Europe had 12 countries with a wealth tax. But today, there are only three. The taxes pushed the wealthy out of the countries, the rules were expensive to enforce, and they didn’t raise as much tax revenue as expected. The other points I’ve mentioned play into why past wealth taxes have failed. So, let’s not emulate past failures of wealth confiscation and redistribution.
Wealth Tax Pros – Trying to Solve a Real Problem
The main benefits – or goals – of a wealth tax are to increase government funding and reduce income inequality. Those can be noble pursuits but a wealth tax wouldn’t be efficient when put into practice.
In the midst of the 4th industrial revolution, there’s a clear problem with wealth concentration. Automation is improving our lives and driving Population Growth. There are now more people trying to fill jobs. But many of the new jobs automate work further and require more years of education… so true Unemployment is climbing. I cover these three trends in great detail in my article on Universal Basic Income.
On a side note, after the longest bull market in U.S. history, of course wealthy investors have more… but they stand to lose a lot more during the next stock market crash. Which I doubt you’ll see those headlines when that happens. Still, we’re entering a new economic paradigm and we need a better plan to create equal opportunities…
Don’t overburden the successful with even more progressive taxes. They’ve learned how to add great value to our society. The majority of the world’s billionaires have improved or created innovative systems. Instead, new policy should focus on improving inefficient programs and leveling the playing field of opportunities.
Now, one wealth tax that I’m more likely to get behind is the current estate tax. When a very wealthy person dies, Uncle Sam takes 40% of the total (after lifetime exclusions and barring other loopholes). And depending on the state the person lived in, there’s an additional cut. This helps prevent dynastic wealth.
The first generation builds it, the second maintains it, and the third squanders it… this isn’t always the case but it’s a good rule of thumb. It makes sense as wealth is divided between heirs and taxed elsewhere. But still, kids of the super wealthy are super privileged. Some of them are taught well and work hard to add even more value to society… but some just enjoy the free ride.
So, implementing a higher death tax for the super wealthy might be a better path forward. If they’ve had innovative ideas and worked hard to build their fortune, they can probably spend their money better than politicians. And a higher progressive death tax would incentivize them to donate the excess to charity (and many of them already do… for example, the Bill and Melinda Gates Foundation)… or they can let the government put it towards equal opportunity programs. This will help give underprivileged people better opportunities to work hard, add value to society, and build their own fortune.
As politicians and voters consider new wealth tax policies, I hope they consider some of the thoughts I’ve shared. And ultimately, I’m a big fan of equal opportunity but too often people confuse it with equal outcome.