A Wealth Tax is Not a Terrible Idea

I would like to write a little bit about a wealth tax; motivated by, but not specifically in the context of, Elizabeth Warren's recently proposed tax on high net wealth individuals. The title might give away a bit of my feelings on the matter, but first, a bit of more general context.

Taxes are a tricky subject, societally speaking. The first-level goal of taxation, of course, is to support the activities of the government: to pay salaries, to pay for services, to pay for defense, etc. However, how taxes are levied, and on what, can also have a fairly substantial impact on the trajectory of a society. Governments frequently use tax policy to encourage or discourage types of behavior, for example, as a short-term leverage point over societal trends. In another facet, tax policy can also have longer term indirect implications for societal trends, some of which may not be obvious to the majority of the public even years after the policies are implemented.

To give a specific example of the latter point, consider California's property tax system, in light of Prop 13. For those who are not in California, the salient point in the law change was limiting the growth of valuation of property for tax assessment purposes to a maximum of 2% annually, far below the actual average annual increases in value. This means that in general, the longer you hold property, the less taxes you need to pay (as a percentage relative to the rest of the population), which means that the people who can accumulate and hold property pay less taxes over time, and relocating has a disproportionately high associated cost. Both of these secondary effects are terrible for California, and contribute the incredibly counter-productive societal forces in the state; it would not be a stretch to say that this aspect of this proposition is the #1 societal issue facing the state in the long term.

But getting back to the main discussion, though, there is significant wealth inequality around the world, and in the US in particular. This is a problem, for various reasons, not the least of which is the tendency of such to destabilize countries in the long term, through eventual revolt. As one might guess, a lot of the problem is tax policy related; for example, capital gains taxes are purposefully lower than income taxes, in a perverse counter-productive policy which rewards people who have substantial existing assets to passively invest, at the expense of people who need to work for a living. Coupled with equally societally damaging property tax policies and other tax-related advantages for passive income sources, and huge wealth disparities between classes of workers in the private sector (ie: corporate executives vs everyone else), and you have a system which primarily propagates and amplifies wealth inequality.

This is a societal problem, and even many people in the top 0.01% know that this is a problem. It's a testament to the effective oligarchy system of government that this problem is still as bad as it is today.

So how could you fix it, if we (the people) were actually able to? Well, obviously, you'd want to fix many of the perverse and broken taxation related systems previously mentioned, as no-brainers, but that by itself would not be enough. Indeed, you would likely also need something like a wealth tax: a recurring tax as a percentage of net wealth, to attempt to counter some of the passive-income related inequality growth inherent in the capitalist system itself.

Now do I like Warren's specific proposal? Only sorta. Although I think the general idea is sound, I would prefer to have something more objective and mathematical, and less arbitrary. For instance, I might construct a system around percentages, where the higher percentage you were in (ie: top 1% vs top 0.01%), the higher your wealth tax rate was, with a smooth increase and no arbitrary steppings.

So for example, the tax could be such that it was based on the logarithm (base 10) of your net wealth, normalized to 0% for the minimum net wealth of someone in the top 1%, and capped at 10% annually. So currently, that would be ~$8M base (amount to be in top 1%); anyone under that would pay 0% net wealth tax, and that would establish a baseline (in log10) of 6.9. Your net wealth tax rate would then be log10(NW) - 6.9, where NW is your net wealth. So someone with $1B net wealth would pay a 9 - 6.9 = 2.1% tax rate, while Jeff Bezos (current net wealth ~$140B) would pay a 4.24% rate. This would be very close to Warren's proposed rates, but would automatically scale in the future without government adjustment, is a smooth curve with no arbitrary steppings, and (also importantly) scales tax rates down if/as the overall average wealth of the country goes up.

That's my 2c, anyway.