All taxes are wealth taxes. All taxes imply the transfer of wealth from the individual owner to a government agency. The only difference between taxes is the tax base or event upon which the tax is levied, and the difference between the total burden borne by the taxpayers and the amount of revenue actually received by the government.
Whenever a new tax or tax reform is proposed, the expected level of tax revenue generated is necessarily of concern to policymakers. The full impact of any given tax structure cannot be separated from the pattern and timing of the expenditures of those tax-derived revenues. People will be affected differently, but if the primary goal of the tax policy is to raise revenue for general government expenditure, then the tax policy can be designed for efficiency. That is, the policy can be designed to minimize income-reducing economic distortions and collection expenditures.
Another species of tax, however, is not intended to be efficient. That would be the case for so-called “sin taxes” that are imposed to discourage consumption of some type of product or activity that is deemed undesirable, such as alcohol or tobacco consumption. These taxes are intended to modify behavior and are not necessitated by any specific need for government revenue – though the tax rates are usually kept just low enough to bring in revenue, without crushing the undesirable activity or promoting smuggling.
Recent calls for a wealth tax fit this latter category, intended by proponents to mitigate the collective ‘sin’ of wealth inequality. Targeting a collective and rather vaguely defined sin allows politicians to avoid verbally attacking the rich for being too productive, or the poor for being unproductive and risk suggesting sloth. “Inequality” is caused by no one in particular but by everyone in general, suiting it to be declared a “systemic” malady for which politicians and interest groups just happen to have a remedy.
The coalitions that support wealth taxes largely consist of those harboring various leftist ideologies based on a materialist worldview that gives primacy to the physical organization of production and its effect on ‘the collective.’ This is in stark contrast to those who are less disposed to ideology but rather value the nonmaterial uniqueness of each individual and the right of those individuals to interact freely in commerce and social activities within the rule of law. The differences in worldview will affect not only the sense of justice and fairness that drives policymaking but will also underpin the policymakers’ understanding of how their tax and other policies will really affect the world.
Can a wealth tax be used to reduce wealth and income inequality? History repeatedly reminds us that, to paraphrase Daniel Webster, “the power to tax is the power to destroy.” A wealth tax that imposes a sufficiently high burden can certainly dissipate great fortunes at a faster rate than it would reduce the fortunes of those with the least wealth. Such taxes do not create wealth but merely confiscate it and discourage its future creation. In plain terms, such taxes discourage the creation of the very thing that makes economic progress possible: capital. But it is worse than that. They discourage the human social and commercial interactions that make the creation and direction of capital possible. Economic growth will be lower than it would have been, and the tax base will also grow more slowly – and even decline if the tax rate is high enough. At the margin, entrepreneurs will shift their efforts toward activities that are less productive but have higher after-tax outcomes.
Can the revenue from a wealth tax be deployed to reduce inequality? Certainly, transfer payments can be made to those of lower wealth levels. The question will be whether those payments can be widely distributed and be large enough to compensate for the loss of income and employment opportunities that would result from the lower-growth economic environment. Not only would their current and potential employers shift into lower growth activities, the transfer recipients themselves would also have less incentive to work and to save, given that they are now being paid to do neither.
Many wealth tax advocates dream of implementing a “basic income grant” or universal basic income. When a government makes such a promise, it creates an obligation that demands the raising of a minimum amount of tax revenue. Given that such transfers of wealth run counter to the incentives necessary to create that wealth, it is unlikely that such dreams can be realized, let alone be sustained.
Worse, but perhaps less obvious to those of a materialist mindset, is that a minimum income guarantee would rob those lowest income people of the dignity of earning their own way. Instead, they might wonder why it is so hard now to find employment and why they really do not have as much incentive to find it anyway.
Dr Richard J Grant is a Professor of Finance & Economics at Cumberland University, Tennessee & Free Market Foundation Senior Consultant.