Fiscal folly: if a wealth tax is about easing concentrations of power, it’s unlikely to work

Subscribe to enjoy similar stories.It’s happening. California looks likely to put a ‘one-time’ tax of 5% on wealth above $1 billion on the ballot in November and polls suggest it could pass— despite opposition from some economists (not so surprising) and Democratic politicians (more so). Meanwhile, calls to tax the rich are resounding across the country, from New York’s proposed ‘pied-à-terre tax’ to Washington State’s first-ever income tax, imposed only on millionaires.As someone who has been arguing for more than a decade that these taxes are bad economics, I find all this disheartening.

I missed the point. I thought the argument was about optimal allocation of resources, but it is really about the redistribution of power. I concede that concentration of power among the wealthy can be harmful.

But using the tax code to fix it will create worse problems. Wealth taxes—that is, taxes on assets as opposed to income—are bad economics because they are nearly impossible to collect to the point where they are largely self-defeating and can often result in less tax revenue. They not only discourage entrepreneurship and job creation, but also distort capital allocation.

All of this is bad for growth. Still, one of the economists behind the California tax has admitted that it may reduce wealth in the economy overall, but that is a price worth paying because inequality is so toxic.Other prominent economists argue the problem with wealth inequality is that it makes the rich too powerful: They can lobby the president and Congress to ensure they maintain their status, which can distort markets and policy. This is a fair point.