Why the toughest capitalists should encourage a wealth tax


You are a successful capitalist and you take pride in getting rich by investing your capital better than anyone. You’re also politically savvy enough to see which way the winds are blowing – not necessarily to your advantage. So you agree that something has to change for the economy to work for everyone, or at least to keep the forks locked.

What change should you support? Ironically, you might want to approve a net wealth tax.

It seems certain that the tax burden on owners of capital will increase. The determination to spend more on utilities and investment has been at its strongest in decades. The same is true when capital wealth has grown much faster than income (wealth / gross domestic product ratios have doubled since the 1980s), the relative contribution to public funds should follow.

This changing political climate is a trend that owners of capital will resist in vain. Instead, they should push for whatever form of taxation is best for them and for capitalism itself. A progressive net wealth tax is an annual levy on taxpayers’ net worth – their total assets minus their debts – paid at an increasing rate above a non-taxable amount.

Only a handful of countries have them, but they include some of the world’s most successful economies, such as Switzerland and Norway. In the United States, a wealth tax has been proposed by Elizabeth warren and Bernie Sanders, the two most left-wing candidates in the last presidential election. So far the The Biden administration’s desire to raise taxes does not reveal any appetite to consider such a tax. Successful capitalists should hope this changes.

All countries already tax heritage assets. They rarely tax them on a regular and recurring basis. Instead, they impose levies on assets when they are traded from one form to another, such as for capital gains tax on realization and stamp duty on transactions, or when they are transferred from one person to another, as with inheritance and gift taxes. In addition, all countries levy recurring wealth taxes in the form of real estate.

All of these factors make capitalism work less well. Taxing wealth only during transactions rewards hoarding rather than deploying or reallocating capital to whatever capitalists may think is the most productive use. It also discourages passing on wealth to younger generations when they can make the most of it.

The incentives created by existing wealth taxes are not only ineffective. Some of them are downright evil. Inheritance and gift taxes impose a lighter burden on the assets of those who live longer or who accumulate more of their wealth than those who die earlier or pass it on more quickly. Property taxes are levied on gross capital wealth, so someone with a 90% mortgage pays the same as someone who owns the same property and is ten times richer.

Capital gains tax penalizes those who make the best investment choices by only taxing incremental growth in wealth and making losses deductible. It also ignores that the ability to pay taxes depends on the total participation of each rather than on the amount. Simply put, such a scheme redistributes millionaires who invest well to billionaires who invest poorly. A net wealth tax would do the opposite.

A tax on net wealth also compares favorably with taxes on the flow of capital income – corporate profits, dividends and interest. They have in common that the more profit you get from investing a given amount of capital, the more taxes you pay. Again, if you invest a billion poorly, you risk being taxed less than if you invest a million very well.

With a net wealth tax, the tax burden is independent of the return. It follows that the best performing investors would keep more of their return and see their capital accumulate more quickly. This is the fiscal version of the New Testament parable of the talents.

Over time, this would place more of the economy’s capital in the hands of those who allocate it properly. The model rewards success and strengthens the potential for the creative destruction of capitalism. An equally progressive wealth tax would, over time, encourage the growth of less concentrated wealth – smaller but more frequent fortunes well invested.

The result is that, of all the means of taxing capital, a progressive net wealth tax is the regime most favorable to capitalism and the most favorable to a democracy of property. And this is surely the social model that works best for long-term capitalists – even the ultra-rich but bad investors who would be hit hardest by the wealth tax.

martin.sandbu@ft.com



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