Wealth Tax: Good Idea? Bad Idea?

Yes, another post on finances…but the Democrat candidates debate gets one thinking….now to the point.

I do not like the idea of wealth tax. There is an enormous wealth inequality problem and while a wealth tax sounds like a direct solution, I feel there are problems with any implementation, such that there just must be a better solution. Let me explain:

  • The problem that needs a solution
  • Challenge & Distortion: Measuring Wealth
  • Is Existing Wealth Always The Problem?
  • Problems With A Wealth Tax As A Solution.
  • Beware of ‘Envy’
  • Conclusion: Is there another way?

The problem that needs a solution

The original inventor of the game of Monopoly planned to use the game as a demonstration of how those who have wealth will gain even more wealth until no one else is left with any wealth.

Clearly this principle is at work in the USA with the concentration of wealth currently seeming unstoppable. There is an ideal that ‘wealth is a result of merit’ which at the extreme believes all who hold wealth deserve that wealth, but even that ideology does not support the outcome that those who hold wealth can then generate more wealth without any further ‘merit’ required. Fact is, the rich get richer because wealth provides a mechanism for creating more wealth.

Yes, there is a left vs right divide, but even if you believe all who gain their initial wealth do so purely on merit, surely there is still a consideration that the expansion of that wealth is then in proportion to the wealth already in place, rather than pure reflection of further merit.

In summary, the problem is the problem of the game of monopoly: the very rich end up with everything simply due to the rules of the game.

Challenge & Distortion: Measuring Wealth

A challenge is that wealth is measured on the basis of economic potential. The potential to generate income or increased value, even when that potential will not be realised.

The result of taxing wealth on this current measurement is that the requirement to pay, can force the utilisation of the wealth to realise economic potential. The valuation of ‘green space’ within a city will reflect the economic potential to maximise returns by, for example, converting the green space high rise apartment buildings to the maximum permissible development density.

In reality there is a continuum between totally benevolent use of wealth such as the Gates Foundation, and full realisation of economic potential. Should it be required that the owners of famous works of art require galleries to pay for displaying that art in order to achieve maximum economic return? While it can be argued that a special exemption for deemed charities such as the Gates Foundation can be provided for, the moment any system requires exceptions there can be loopholes. Further, the whole point is that there is a continuum, of use of ‘wealth’ rather than a binary division between 100% maximum economic realisation and complete charity.

Is Existing Wealth Always The Real Problem?

The problem is that wealth is measured by the potential maximum economic return, not actually economic return. I suggest that the real problem is actual economic return and thus further wealth, rather than the unrealised potential of wealth to generate further income. Possibly if wealth is taxed on the basis of actual income generated by that wealth it could solve this anomaly, but isn’t that returning to taxing income rather than ‘wealth’ as determined by the economic potential of the wealth?

Perhaps high taxation rates on income from existing wealth could be a better solution. This would remove creating a new artificial incentive for all wealth to be used to achieve economic goals, and still allow for wealth to applied for environmental or other goals without penalty.

Problems With A Wealth Tax As A Solution.

Imagine a celebrated artist dies. Their spouse inherits the art collection which suddenly increases in value triggering the wealth tax. The only source of paying the tax is to sell some of collection. The forced, under pressure sale, does not realise expected value, which then reduces the estimated value of the remaining collection – perhaps to level below the wealth tax, such that selling the part of the collection in the first place would no longer be needed.

Just as an old person having to sell their home because the land has the potential to become the location of a huge high rise, even though if the development remained as their home it would not trigger the threshold would also seem unjust.

It is just too easy to forsee problems arising because wealth is all about theoretical potential, while income it real.

Beware of ‘Envy’

Is there a risk of entering into the politics of Envy? If the someone hold a trove of assets should they should be forced to sell some of those assets? Or could we wait until some attempt is made to realise the value of the assets and collect tax then as the real goal to prevent the use of those assets to resulting in increased wealth inequality. While that assets or ‘wealth’ is dormant and not realised, wealth inequality is not increasing.

Conclusion: Is there another way?

The problem a wealth tax seeks to address is very real. But I do not think the problem exists solely because of a specific tax on wealth itself. Isn’t the problem wealth inequality problem that not that nothing can be done, just that the will to act has often been betrayed.

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