To Reduce Inequality, Tax Wealth — Not Income

Search form

To Reduce Inequality, Tax Wealth — Not Income

To Reduce Inequality, Tax Wealth — Not Income
Mon, 11/26/2012 - by Daniel Altman
This article originally appeared on The New York Times

Whether you’re in the 99 percent, the 47 percent or the 1 percent, inequality in America may threaten your future.

Often decried for moral or social reasons, inequality imperils the economy, too; the International Monetary Fund recently warned that high income inequality could damage a country’s long-term growth. But the real menace for our long-term prosperity is not income inequality — it’s wealth inequality, which distorts access to economic opportunities.

Wealth inequality has worsened for two decades and is now at an extreme level. Replacing the income, estate and gift taxes with a progressive wealth tax would do much more to reduce it than any other tax plan being considered in Washington.

When economists try to measure inequality, they typically focus on income, because the data are most readily accessible. But income is not always a good gauge of economic power.

Consider a group of people who all have high incomes but differ widely in their wealth. Who’s going to get into the country club? Who’s going to have the money to finance a new venture? Moreover, income data may not reveal the true economic power of people who are retired, or who receive their pay in securities like stocks and options or use complex strategies to avoid taxes.

Trends in the distribution of wealth can look very different from trends in incomes, because wealth is a measure of accumulated assets, not a flow over time. High earners add much more to their wealth every year than low earners. Over time, wealth inequality rises even as income inequality stays the same, and wealth inequality eventually becomes much more severe.

This is exactly what happened in the United States. A common statistical measure of inequality is the Gini coefficient, a number between 0 and 100 that rises with greater disparities. From the late 1970s through the early 1990s, the Census Bureau recorded Gini coefficients for income in the low 40s. Yet by 1992, the Gini coefficient for wealth had risen into the mid-70s, according to data from the Federal Reserve.

Since then, it has risen steadily, to about 80 as of 2010. In 1992, the top tenth of the population controlled 20 times the wealth controlled by the bottom half. By 2010, it was 65 times. Our graduated income-tax system redistributes a small amount of money every year but does little to slow the polarization of wealth.

These are stunning changes. The global financial crisis did make a dent in the assets of the wealthiest American families, but its effects for the bottom half were utterly destructive; the number of owner-occupied homes has fallen by more than a million since 2007. People in different socioeconomic strata are living ever more different lives, with dangerous results for society: erosion of empathy, widening of rifts and undermining of meritocracy.

American household wealth totaled more than $58 trillion in 2010. A flat wealth tax of just 1.5 percent on financial assets and other wealth like housing, cars and business ownership would have been more than enough to replace all the revenue of the income, estate and gift taxes, which amounted to about $833 billion after refunds. Brackets of, say, zero percent up to $500,000 in wealth, 1 percent for wealth between $500,000 and $1 million, and 2 percent for wealth above $1 million would probably have done the trick as well.

These tax rates would garner a small portion of the extra wealth America’s richest families could expect to accrue simply by investing what they already had. The rates would also be enough to slow — if not reverse — the increase in inequality.

To see how the wealth tax would work, consider a family with $500,000 in wealth and $200,000 in annual income. Right now, they might pay $50,000 in federal income tax. With the wealth tax brackets described above, they would pay nothing. On the other hand, a family with $4 million in wealth and $200,000 in annual income would owe $65,000. Most families that depend on their wealth for their income would pay more, and most that depend on their earnings would pay less.

In fact, the majority of American families would receive an enormous tax cut. Some would owe only payroll taxes (for Social Security and Medicare) and state and local taxes every year, and others would pay less in wealth tax than they did in income tax. Taxes on earnings, capital gains, dividends and interest, all of which may distort decisions about working and investing, would disappear.

For most families, whose wealth may never reach $500,000, all disincentives to save would vanish. And families trying to accumulate a fixed amount of wealth for retirement or their children’s college fund could devote less of their incomes to saving, since in most cases the wealth tax would take a smaller bite of their interest, dividends and capital gains than the current income tax.

Though the remaining minority of families subject to the wealth tax might end up saving less and spending more, this shift would also reduce inequality; the dollars they spent would be more likely to end up in the pockets of people with less wealth.

Scholars have recommended a wealth tax in the past, but not as a replacement for the income, estate and gift taxes. Indeed, phasing in the new tax would present some complications. People who already paid income tax on the money they used to buy their assets would not want to pay a new tax on them. Yet a reduced wealth tax — perhaps 1 percent in the top bracket to start — would collect less from many of them than the current income tax.

Naturally a cottage industry would spring up to help wealthy people lessen their exposure to the new tax. The federal government would need new rules for the reporting and valuation of assets, as well as new auditing processes. Levying the tax at the family level — perhaps parents and children up to a fixed age — might make it harder for the wealthy to reduce their tax liability by allocating their assets among multiple family members to reduce the wealth-tax liability.

By contrast, people with wealth tied up in property and small businesses might have real trouble coming up with enough cash to pay the tax. This is a problem that can be solved, or at least mitigated, by making payment periods flexible over several years. In addition, new financial products could offer cash for tax payments, either as loans or in return for partial ownership of assets — much like home equity loans do today.

States with income taxes would have to decide whether to switch to the wealth tax. Because some states collect tax from commuters who work within their borders but live elsewhere, an income tax might still be attractive. Yet rather than having two systems, it might be better to apportion state wealth taxes between the states where families live and work.

The benefits of the wealth tax would make these adjustments worthwhile. The economy would allocate opportunities more equitably and efficiently, and the tax system would become simpler. It would help working class people to realize their potential and ensure that society did not become unduly polarized. Of course, we can do much more to improve access to opportunity for all Americans. But a wealth tax would be a good place to start.

Daniel Altman, an adjunct associate professor of economics at the New York University Stern School of Business and a former member of the New York Times editorial board, is writing a book about what would happen if the United States defaulted on its debts.

Article Tabs

Plains All American, Surfrider Foundation, oil spill, Santa Barbara,

New details have emerged about Plains All American's long history of generating similar disasters.

The U.S. ranks among the most unequal countries, surpassed only by Turkey, Mexico and Chile.

$15 minimum wage, low wage workers, fast-food worker strikes, Fight for 15, minimum wage hikes

Some of the biggest cities in America are now defying decades of economic orthodoxy and challenging social norms that regarded low-wage jobs as unavoidable and acceptable.

Joseph Stiglitz, Bernie Sanders, new populism, democratic populism, wealth inequality, income inequality, Next System Project

It's time to begin the careful work of knitting together broad, pluralistic conceptions of what a transformed system might look like.

Trans-Pacific Partnership, TPP, corporate trade deals, whistleblowers, fast track, Trade Promotion Authority

Letter signed by more than 250 firms demands greater transparency and says "dangerously vague" language would criminalize whistleblowers.

Britain’s election shows it's no longer a united kingdom, that Scottish independence is increasingly likely – and that the new Conservative government will only further fracture an already deeply unequal society.

Posted 4 days 12 hours ago
fracking ban, Denton fracking, anti-fracking legislation, Greg Abbott

Texas Governor Greg Abbott signed a bill into law that prohibits cities and towns from banning an oil drilling practice known as hydraulic fracking, giving the state sole authority over oil and gas regulation.

Posted 3 days 12 hours ago

The Balkan country has been thrown into political crisis with the government implicated in a massive wire-tapping scandal and rigged elections, the opposition leader accused of plotting a coup, and 18 shot dead last week in a bloody gun battle.

Posted 4 days 12 hours ago

The tide of public resistance against a proposed free trade agreement between the U.S. and the European Union is rising in Germany, as opponents say the plan would harm democracy and rule of law.

Posted 3 days 12 hours ago

The $5.3 trillion subsidy estimate for 2015 is greater than the total health spending of all the world’s governments.

Posted 2 days 11 hours ago
Trans-Pacific Partnership, TPP, corporate trade deals, whistleblowers, fast track, Trade Promotion Authority

Letter signed by more than 250 firms demands greater transparency and says "dangerously vague" language would criminalize whistleblowers.

The Balkan country has been thrown into political crisis with the government implicated in a massive wire-tapping scandal and rigged elections, the opposition leader accused of plotting a coup, and 18 shot dead last week in a bloody gun battle.

Robin Hood Tax, financial transactions tax, income inequality, student debt

There is widespread support for Sen. Bernie Sanders's proposals, introduced Tuesday in Congress, to use a Robin Hood tax on stock transactions to fund tuition at four-year public colleges and universities.

worker-owned cooperatives, worker-owned businesses

New York City is home to the country’s largest worker-owned co-op, Co-operative Home Care Associates, which employs some 2,300 workers, mainly immigrant and minority women in the South Bronx.

Sign Up