This article was a winner of the Wealth Tax scholarship opportunity. It contains one essay arguing against the implementation of a wealth tax.
The wealth tax can be defined as a tax based on the market value of personal assets [1]. Simply put, this is a direct tax that is levied on the wealth of an individual, above a certain threshold. The reason there is a threshold is to prevent the taxation of less wealthy individuals, which relates to the tax purposing as a progressive tax. In this essay, we will talk about the potential advantages and disadvantages of imposing such a tax, and finally, come up with a fair and evaluated conclusion.
Advantages of The Wealth Tax
The first and most obvious advantage of the wealth tax is its progressive nature. This means that as a person’s income or wealth increases, they pay a higher percentage of that income or wealth (as income and wealth are related) [2]. This can be advantageous as it helps to redistribute wealth and thus reduce inequality within a country. In America, there is a significant problem with rising wealth inequality as shown by the graph below:
Unsurprisingly, as most of the individuals getting taxed will be at the higher thresholds, it goes without saying that an income tax will take wealth from the top band, and redistribute it to the larger proportion of society, which in turn could reduce the Gini Coefficient (a method of measuring inequality that has shown an increase in inequality in the US since 1967) [3].
Moreover, a particularly important benefit of any tax in fact is the revenue it can raise for the government. Understandably, as the wealth tax taxes a huge amount of money (usually in the billions) for richer individuals, it will in turn raise a lot of capital. Estimates for the total were conducted in a paper in 2019 [4] , suggesting about $94 billion raised from imposing such a tax. This would account for about 3% of the federal receipts, thus giving the government a large sum of money that could be spent on improvements on infrastructure, research and development or suitably, redistributed to the poorer in the form of benefits. In doing so, the progressive nature of the tax seems to be further fulfilled, by distributing money to low-income households, thus inequality in America could see a massive decrease.
Disadvantages of The Wealth Tax
The consequences listed above may all seem favourable as a means of reducing inequality and improving the economic state of America, however, one must take into account the other side of the coin. Namely, it will be very difficult to employ such a tax. The IRS seems to already be struggling with taxation, with over $300 billion of a tax gap every year. The issue with the Wealth Tax is its challenging implications. It is not easy to determine accurately the wealth of any individual, let alone the wealth of potentially millions of people. Of course, there are a number of organisations able to estimate the net worth of an individual, but without a standardized system of evaluating wealth, it is impossible for such a system to be fair.
Additionally, a large number of varying assets from person to person, makes calculating wealth even more difficult. Consequently, an inadequate system of calculating taxes can lead to injustice and inequality, missed taxes that are not being collected, and thus make the tax a whole lot less efficient. Therefore, overall, the impact on inequality or redistribution of wealth may not be as significant as the 3% figure in mind, deeming the tax to be less useful than initially thought.
Moreover, the efficiency of the tax is in question with the possibility of legal tax avoidance. There are numerous articles and reports proving that wealthier individuals always seem to find ways of paying minimal amounts of tax than what would seem adequate [5]. Of course, if the wealthy are already able to avoid current taxes, why can’t they do the same for the wealth tax? Moving assets to different countries, renouncing citizenship or moving residence to other nations may seem farfetched ideas, but when there are millions at stake, the wealthy are more than willing and able to turn to such measures.
Conclusion
The wealth tax is undoubtedly one of the most debated ideas in all of economics, and as seen in this paper, there certainly are a number of pros and cons to the implementation of such a tax. Overall though, after analysing other nations in how they have fared off following a wealth tax, it seems like the US should not have a wealth tax. Most countries seem to have eliminated their existing wealth tax policies, but those who do still have them do not usually see a large amount of revenue nor redistribution [6]. Additionally, as the potential benefits of the wealth tax seem to be addressed in a number of other successful progressive tax systems, such as income taxes, ACA taxes and estate taxes; it seems almost redundant to impose a new tax that could even de-incentivize the wealthy: a group of individuals that have an enormous impact on keeping the economic activities within America running. Thus, the final verdict that is reached, is that America should not have a wealth tax.
Bibliography
Kagan J. (2021) Wealth Tax. Investopedia. Available at: https://www.investopedia.com/terms/w/wealth-tax.asp [Accessed 02/19/21]
Desjardins J. (2017) The Relationship Between Income and Wealth. V isual Capitalist. Available at: https://www.visualcapitalist.com/relationship-income-and-wealth/ [Accessed02/19/21]
DataTrek Research. (2019) Us Income Inequality: Latest Data. Available at: https://datatrekresearch.com/us-income-inequality-latest-data/ [Accessed 02/20/21]
Zucman G. & Saez E. (2019) Progressive Wealth Taxation. Brookings Papers on Economic Activity. Fall 2019. Available at: https://gabriel-zucman.eu/files/SaezZucman2019BPEA.pdf [Accessed 02/20/21]
Chu B. (2020) Wealthiest in Britain paying just 20 per cent tax rate, new research shows. Independent. Available at: https://www.independent.co.uk/news/business/news/wealthy-uk-tax-cost-rate-capital-gains-income-tax-a9 566211.html [Accessed 02/21/21]
Peter G. Peterson Foundation (2020) What is a wealth tax, and should the United States have one? Available at: https://www.pgpf.org/blog/2020/01/what-is-a-wealth-tax-and-should-the-united-states-have-one#:~:text= A%20wealth%20tax%20is%20usually,household%20above%20an%20exemption%20threshold.&text=U nder%20this%20plan%2C%20the%20individual,million%20in%20total%20wealth%20taxes. [Accessed 02/21/21]
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