Why not have a wealth dependent income tax?

Question

Usually states implement a progressive tax. So people with a higher income have to pay a higher tax rate.

However I think that this is not helping much to distribute wealth more equally. Instead I imagine that it would be better to have an income tax which depends on someone's already existing wealth. So someone who has already accumulated a lot of wealth would have to pay a higher income tax compared to someone who doesn't own a lot. The rationale for this is that this would make it easier for someone with nothing (e.g. young people) to accumulate wealth quickly if she/he has a high income job. But the accumulation of wealth would automatically slow down if one already has enough. Wouldn't such a tax system be better for decreasing the wealth gap?

Why don't we have a wealth dependent income tax?

UPDATE: I toned down my wording a bit to make clear that I do not want communism or socialism. What I want is to decrease the wealth gap and distribute the wealth more equally. I do not want to eliminate all differences in wealth. But I believe the state should give an incentive for very wealthy people to retire and also make it easier for the young or unwealthy to become wealthy.

UPDATE2: To compute the income tax based on wealth I imagine a formula like this:

income_tax_percentage = ( 1 - (100000 $/(wealth_in_$))) * 100%.

Let's calculate examples: wealth = 200000$, => 1-100000/200000 => income_tax_percentage = 50%. wealth = 1000000$, => 1-100000/1000000 => Percentage = 90%. The formula is far from perfect, but maybe you get the idea. Above a certain amount of wealth it should get harder and harder to accumulate more wealth. But the income_tax_percentage can never exceed 100% (and should also never be below 0%).

Answer 1

You're not alone in thinking that taxing wealth more and income less is a way to reduce inequality. It's something that some commentators do argue (here's an example from the NY Times), and most countries already have a mix of taxes that include both income, and things that are linked to wealth independent of income (examples below).

However, your suggestion is unusual in basing the rate on one variable, while taking from another. Income and wealth are independent - they tend to correlate, but it's perfectly possible to have one very high and one very low. Mixing independent variables like this can create bizarre or perverse situations. Here's two:

• Imagine a very rich heir who doesn't work. His wealth means he pays a high % of his income - but his tax contribution will be 0, because his income is 0, despite the fact he's very able to pay.
  • ...Then let's imagine he has an equally endowed identical twin brother who decides to develop a useful profession, and takes an entry level job. The whole of his modest income will be hit by the very highest tax rate (unlike regular income taxes which usually spare the first few thousands earned). After factoring in work related costs like accommodation and commuting, his work will be making him less well off than his layabout brother, while the state gains a little - a high % of not very much. No-one wins.
• Imagine two regular people with identical jobs and background. One saves and invests most of their income, and the other blows it on short term thrills. After a few years, this tax system reduces the saver's earned income to less than that of their reckless colleague - despite them doing identical work. That won't be popular.

When income taxes are linked to income, you have to earn more to be taxed more, and you'll always earn more than your lower-earning colleague after tax. In countries with wealth taxes linked to the value of your assets, you have to own more to be taxed more on it, and you'll still own more after tax.

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Then there's the fact that measuring an individual's wealth is very difficult, because it can take many forms, especially if someone has an interest in hiding it. The wealthier someone is, typically, the more complex and diverse their assets.

"Wealth taxes" on total assets do exist, but they're not any country's primary means of taxation. They typically rely on people self-declaring their own assets, are difficult to strictly enforce, and have major exemptions and gaps in the name of practicality.

For example France's Solidarity Tax is on a self-declaration basis. It makes up 1.5% of France's tax income - certainly not nothing, but not one of the heavyweights. It excludes some of the hardest-to-value assets such as vintage goods and IP rights, and only applies above a high threshold (net wealth exceeding €790,000) - less than 1% of the population paid any in 2007 (528,000 of 62m); half pay less than €2,000 a year.

Even with such a low % of the population affected, taxes like this are hard to enforce and not so hard to legally avoid or reduce - for example, wealthy French people keeping wealth in neighbouring Belgium is common, as well as buying exempted assets, giving "temporary gifts" and other such techniques.

Basing a primary tax system on measures of total wealth is difficult and risky, and if you wanted everyone to be assessed, the enforcement would be incredibly expensive.

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But there are many more common, widespread forms of wealth-related tax which don't attempt the difficult task of measuring an individual's total assets. The following are all similar to what you describe in terms of overall impact (taxing our layabout heir more than a hard-working young professional trying to fill their first savings account):

• Taxes on savings-based or asset-based income (e.g. interest, capital gains).
• Taxes on property (real estate). These can be based on the value of the property, or the value of the land, or both.
• Goods taxes, sales taxes, consumption taxes. These are typically applied only to non-essentials and/or luxuries (or, they have higher rates for such goods)
• Inheritance taxes, and other taxes on transfers of wealth

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Most tax systems do already in various ways tax both existing wealth and income (to varying degrees) - but they keep each one in proportion to the actual thing being taxed, and they focus on specific, measurable forms of wealth.

That said, it's worth noting that there is one link between France's wealth tax and income. There's a rebate you can claim ("Bouclier Fiscal", or "tax shield", introduced relatively recently by the conservative Sarkozy) if your tax bill (income tax, ISF and local tax) exceeds 60% of your total income. The tax isn't taken from income, but a check was added to cap how much it can deplete your income.

Would this spare our layabout heir from paying any tax in France? Potentially, in theory (and as a policy, it's been criticised for this, and may be repealed or replaced with a 75% "ceiling"), but probably not in practice. France has many other forms of wealth-related tax such as property taxes, and, as quoted in l'Humanite, most eligible households (62.5%) haven't claimed this rebate, probably...

...because they have calculated ‘borderline’ tax and financial figures and don’t want the administration taking a look at their papers.

Self-assessment of wealth for tax purposes gets rather messy.

Answer 2

We don't tax income based on wealth, because taxing wealth is what the wealth tax is for.

For example, in The Netherlands, the tax office assumes investments return 4% of their value, and this is then taxed at 30%. Effectively, this is a 1.2% wealth tax. If you put more than a minimum amount of money in a savings account, this will be taxed. And effectively, it does depend on income, because in a capitalist system, individuals and organisations who have more wealth can (and typically do) use this wealth to acquire more income.

Other people have pointed out wealth can also be stored in paintings and wine bottles. This is true, although this kind of wealth may not generate income, unlike savings accounts or stock investments, that are easier to measure than less liquid ways of storing wealth.

Other examples of wealth tax can be found on Wikipedia.

Answer 3

Accurately measuring wealth for tax purposes is difficult and extremely intrusive.

To tax based on a person's total wealth, a government needs to compute the person's wealth exactly. It is considerably more difficult than figuring out income. Most income can be traced to specific money movements (wages, contractual payments, sales of property and so on). Wealth, on the other hand, may consist of parts that are not easy to measure. That 17th century painting on the wall that has stayed in the family for over 100 years - how much is it worth this year? Exclusive by-invitation-only club membership - put a money quote on it, please. What about intangible property, such as trademarks and goodwill - do they need to be appraised every year now? With complex legal and financial structures employed by rich people to organize their affairs it would be quite difficult to even list everything a person owns.

Secondly, it would not be simply difficult - it would give government a right and in fact an obligation to snoop on all kinds of people's affairs. Even if it was possible to trace all the items I listed above, many citizens would be unhappy that their government knows so much about them.

Finally, similar results may be achieved through a simpler means - consumption taxes, inheritance taxes and excise taxes on luxury goods.

tl, dr; It would be difficult and intrusive. Other taxes (e.g. on consumption) achieve similar results much easier.

Answer 4

All good points above. A few other issues, or perhaps just different way of describing already valid points.

First, I am speaking specifically in comparing the sort of income based wealth tax to a more traditional wealth tax, which places a tax on the value of wealth someone already has; such as taxes on owned real estate and the inheritance tax. Ie, assuming one chooses to create a tax to address the wealth divide, why not do it with an income based one?

Discouraging savings for less wealthy is bad

A system like this would discourage saving, the way to have the most available spending money would be to spend it every year as fast as you make it to avoid any extra tax on income. For the very wealthy perhaps your okay with this. However, look at the poor. Statistically those at a lower social-economic level have less of an understanding of economics and savings, and are more prone to spend any excess income rather then saving it. A system like this would further encourage them to do so.

However, if someone who is poor, or even middle class, runs into some hurdle, they lose their job or are disabled etc, the government will be responsible for supporting them. The less savings they have when such a disaster occurs the more they will depend on the government to assist them, thus putting more of a drain on government assistance. Furthermore, the less you have the harder it is to save money, for many reasons, so a small bump in the road for someone who is just barely middle class can put them in just enough debt to keep them in debt forever because they didn't have the savings needed to avoid that debt. Basically, discouraging middle and lower class from saving money increase later government welfare and lowers quality of life for those who lack savings. In a rational world this may not be a problem, but humans aren't always rational and a small tax based off of wealth can have a disproportionately large affect on humans tendency to save.

Though, an alternate approach to the above which had the wealth-income tax only kick in for people of a certain income or above could easily avoid this problem, because it won't discourage those who are likely to be in dangerous situations from saving.

The economy needs our rich investing

This system would also discourage people of wealth from working, since they would make so little money. Even if you didn't allow a 100%+ income tax, if it was at 95% for a wealthy individual that person may be inclined to live a life of leisure rather then working all day to make a fraction of their income. They may even go in batches, work every three years or so, spending two years living off their previous income and letting their net wealth drop so that their net worth is low enough that they don't suffer the same penalty to working.

However, these rich folk tend to hold allot of money, and their using it to invest in businesses and buy companies etc helps to drive the economy, this is part of the invisible hand of the economy. We would rather they work and lead companies and invest money so that their money can be active in our economy and helping it to grow rather then their sitting on the money in a bank account where it does far less to empower our economy. Encouraging people not to work is always a bad thing, no matter what their income, since the Invisible Hand means the more folks involved in our economy the stronger our economy likely will be.

There is a limit to how much we can tax the rich

This would also likely drive the very rich to move away from the nation that has this policy, instead living somewhere where they are taxed less, and then we loose all their taxes. This is a major issue whenever discussing any increased tax on the rich, they aren't required to stay in your nation! Admittedly this is really an issue with any sort of wealth tax, and not necessarily a problem unique to this proposal.

However, looking at the above argument from a different perspective, there is an upper cap on how much we can tax the rich before we drive them away. If we are going to put some cap on our taxes then any increase on one form of tax will be a decrease on another to stay under that cap. A wealth based income tax means we would have to charge less in the form of more traditional wealth taxes or drive away our wealthy.

The problem being that a traditional wealth tax addresses the wealth divide as well as an income based one, without discouraging the wealthy from working; thus this tax would require removing the possibility for a standard wealth tax which would potentially be better way of addressing the wealth divide.

Finally, and most cynically, good luck getting it to pass when the wealthy are the ones that 'donate' totally-not-bribes to the politicians. Money talks, and it mostly says "hey stop taxing me" ;)

Actually, I wonder about the opposite. Instead of a traditional wealth tax a tax specifically on wealth that is in savings, ie not invested in businesses or the like, to encourage the wealthy to continue spending money to drive and strengthen the economy rather then sitting back on their laurels and just living off their accumulated wealth. Though I suspect it would be nearly impossible to define a law like this that didn't have obvious loop holes and was realistic to enforce.

Answer 5

• Leaving aside both the desirability of your stated goal ("to close the wealth gap" - but if you recall, every country that vigorously tried, ended up with near-universal low standard of living. Look up USSR, North Korea, Mao's China, or modern Venezuela);

• ... as well as obvious political realities (wealthy people have political clout, far more so than high-income people; because the retirees are included and in modern western democracies Baby Boomers are basically the dominant political class votes-wise); ...

• another reason is that is likely simply wouldn't work.

  1. People with existing high wealth don't need income. So if you tax their income high enough, they will simply stop bothering to earn more money - which will dry up your tax base real quick.

  2. They can also use accounting tricks to shift off their income onto less-wealthy people (e.g. give high-risk/high-return investments to their children; and keep low-income safer investments; or give high-paying jobs to their kids instead of themselves).

  Matter of fact, that would enable people to VERY effectively circumvent estate taxes (which are currently astronomically high) using the latter approach, since high income wouldn't be taxed as much anymore - so you set up a corporation which you own, have all your income go to that; and expense 100% of that income as salary to your kids who have less wealth). So, again, your tax base shrinks even more.

  Actually, this works even worse than that, since you can take your (ostensibly, poor) child, pay him a yearly income that's equal to your entire net worth, then have that income taxed at their "poor net worth" tax bracket. Voila, now they got 100% of your wealth without paying high taxes on either inheritance OR income OR wealth (you can try to un-game this by weighing the tax bracket against average wealth for a year, instead of January 1 wealth; but that means the income can be scheduled for December 31, reducing your tax bracket by x365).

• And lastly, since we mentioned estate tax, effectively, it serves precisely the way you want - it taxes the net worth. US has a very high estate tax, of 40% at top margin.

Answer 6

I think there are a number of excellent answers, which I in no way want to detract from, but I want to introduce one more problem with this scheme. This creates a perverse incentive to spend one's wealth rather than saving it. Consider the case where 2 people each make 1million dollars per year; clearly the kind of people this system is designed to tax. One person, let's call him Gatsby throws extravagant parties, flies all over the world, and consumes expensive caviar, saving only 10% of his income. The other person, let's call him Warren, lives modestly(by millionaire standards) and saves 50% of his income. By the time they've both been working for 20 years, Warren has 10 million dollars in wealth (really quite more than that thanks to investment and compound interest) and Gatsby has 2 million dollars in wealth.

If we base income taxes on income and wealth, then Gatsby is going to pay far fewer taxes over his lifetime than Warren, despite the fact that they are both people with the same lifetime income. Many would see this as not particularly fair and would lament the fact that it encourages people to behave like Gatsby instead of Warren. This tax system favors jet rides over fancy houses, performance art over visual art, and fine food over fine furniture. Many would see incentivizing the former over the latter in these cases as rather arbitrary and unnecessary, especially when income taxes (including reasonable capital gains taxes) don't introduce these kinds of distortions.

Answer 7

On of the core ideas of good government regulation is that it's simple. Our tax system already suffers from being very complex which produces a lot of costs. Intelligent people don't work on producing valuable goods but work as accountants and lawyers to optimize tax payment, to pay as little as possible.

According to the National Taxpayers Union found federal tax compliance in the year 2014 cost $226 billion. For comparison Berny Sanders plan for free college costs $70 billion per year.

A wealth dependent income tax would raise the tax compliance costs even more because it requires regular appraisal of wealth. That's completely the wrong direction for tax policy.

Answer 8

1. Difficulty in measuring. Wealth is a quantity in flux; it is constantly changing, and valuations may go out of date, as a result of inflation, depreciation or other factors.

2. Disincentive. Conservatives argue heavily against progressive taxation because they claim it removes the incentive of the wealthy to continue investing or providing their valuable services. They argue even more against wealth taxes, as it means income can be negative if a wealthy person decides to not do any work that year (under a regular income tax, 0 income would be subject to 0 tax).

3. Impracticality compared to alternatives. Why bother trying to establish the wealth of everyone for tax purposes when capital gains taxes, inheritance taxes and others place a heavier burden on the wealthier anyway?

Answer 9

Taxes don't just have to be fair, they must also be easy to tax. And I think that income is a bit harder to hide than wealth.

Answer 10

Another case where it would be a very bad idea: A person whose whole wealth is in the form of ownership of a corporation. Should they be required to sell shares to pay the tax bill? I don't find this reasonable.

Answer 11

Back to the initial question: although a very populist and recurring argument, the taxation of wealth works only once: when there is accumulated wealth to tax in the first place. Contrary to people, States will spend every penny they can get and take no precaution for the times when this "former wealth" is exausted.

As States are not productive imho it´s more important to let people accumulate wealth which they in turn will reinvest (restaurant waiter after 20 years becomes restaurant owner).

Answer 12

The use of taxation to promote any form of public policy is socialism. The only legitimate use of taxation is to pay for our common defense. All of us "citizens" talk about tax reform because the current taxation doesn't work for us. Politicians give lip service to tax reform because we talk about it, but they will not produce any substantial reform because it works for them, it is doing just what they want it to do - redistributing wealth from the silent mass in the middle to the publicly noisy poor and the privately powerful rich. And hence, they stay in office.

Answer 13

Violations of the individual liberties; every citizen, by nature of their existence, has a right to equal protection from the law, as codified in the 14th Amendment.

If we start taking punitive measures against those who successfully amass wealth, then you have created a disincentive for people to succeed. Though, the question becomes, what is enough?