Yes, Rothbard Covered That: Wealth Tax Edition

Economist and Council on Foreign Relations member Daniel Altman has a column in yesterday’s New York Times which says, “To Reduce Inequality, Tax Wealth, Not Income.”

Rothbard explained in Power and Market why a “wealth tax” would be particularly pernicious (see his conclusion in bold below):

Although a tax on individual wealth has not been tried in practice, it offers an interesting topic for analysis. Such a tax would be imposed on individuals instead of on their property and would levy a certain percentage of their total net wealth, excluding liabilities. In its directness, it would be similar to the income tax and to Fisher’s proposed consumption tax. A tax of this kind would constitute a pure tax on capital, and would include in its grasp cash balances, which escape property taxation. It would avoid many difficulties of a property tax, such as double taxation of real and tangible property and the inclusion of debts as property. However, it would still face the impossibility of accurately assessing property values.

A tax on individual wealth could not be capitalized, since the tax would not be attached to a property, where it could be discounted by the market. Like an individual income tax, it could not beshifted, although it would have important effects. Since the tax would be paid out of regular income, it would have the effect of an income tax in reducing private funds and penalizing savings-investment; but it would also have the further effect of taxing accumulated capital.

How much accumulated capital would be taken by the tax depends on the concrete data and the valuations of the specific individuals. Let us postulate, for example, two individuals: Smith and Robinson. Each has an accumulated wealth of $100,000. Smith, however, also earns $50,000 a year, and Robinson (because of retirement or other reasons) earns only $1,000 a year. Suppose the government levies a 10-percent annual tax on an individual’s wealth. Smith might be able to pay the $10,000 a year out of his regular income, without reducing his accumulated wealth, although it seems clear that, since his tax liability is reduced thereby, he will want to reduce his wealth as much as possible. Robinson, on the other hand, must pay the tax by selling his assets, thereby reducing his accumulated wealth.

It is clear that the wealth tax levies a heavy penalty on accumulated wealth and that therefore the effect of the tax will be to slash accumulated capital. No quicker route could be found to promote capital consumption and general impoverishment than to penalize the accumulation of capital. Only our heritage of accumulated capital differentiates our civilization and living standards from those of primitive man, and a tax on wealth would speedily work to eliminate this difference. The fact that a wealth tax could not be capitalized means that the market could not, as in the case of the property tax, reduce and cushion its effect after the impact of the initial blow.

Comments

  1. What’s the point of “achieving equality” by bringing people down? The economy is not a zero sum game – someone else’s loss does not make me better off. My house is not better if the house across the street catches fire. America has bigger income differences because Usain Bolt is in your heat. If someone breaks Usain Bolt’s knees before the race, that does not make me run faster. And in the economy, there is no “gold medal” for being first in and of itself – it’s a matter of the absolute, not the relative – would you rather be in the bottom 10% of Americans or the second 10% of Sudanese?

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