Many politicians, all of them Democrats, are proposing taxes on wealth, especially for those who are very wealthy. Last year Elizabeth Warren (D, MA) proposed a wealth tax that was generally not well received. This year, more Democrats are calling for a wealth tax. Is this a good idea?
In California, Democrat Rob Bonta proposed a wealth tax on Californians. The tax would be paid annually and due for ten years after a taxpayer left the state. Democrats note that income inequality is increasing and taxing the wealthy would be a way to reduce that inequality.
Some Dems want to raise income tax rates and want a wealth tax.
Others like Alexandria Ocasio-Cortez (AOC) want to raise the maximum income tax rate to 70%. This too, she argues, would reduce income inequality. And she wants New York Governor Andrew Cuomo to impose a wealth tax on all New Yorkers who have a net worth of $1 billion or more.
The reality is that these proposals are not only counterproductive, but they would increase, not reduce, income inequality.
In addition, wealth taxes are simply not fair and would double tax earned income.
The financial goal of every American is to increase wealth. More wealth provides a higher standard of living, security against unforeseen emergencies and provides for retirement. It also allows individuals to bequeath that wealth to whomever they choose, usually providing opportunity and security for future generations of their family.
How is wealth created?
Wealth is created by individuals or corporations who earn income. For individuals, they pay federal and state income taxes on the earned income. What’s leftover is their disposable income. Most of the disposable income for most income earners is spent, by consuming goods and services that satisfy needs.
If individuals have any income left over, that income is saved or invested. That creates wealth. Some individuals reduce their consumption of goods and services so that there is more available to create wealth. But savings and investment dollars from individuals come from earnings after taxes are paid. So, the wealth they create has already been taxed.
Individuals can create more wealth from their investments, which pay dividends or interest or are sold at a price above the purchase price. But dividends, interest and capital gains are all subject to income taxes. Those taxes are paid before any new wealth is created.
Corporations create wealth too.
Similarly, corporations create wealth for their stockholders by earning a profit, paying taxes on that profit and then either by paying dividends to stockholders or by retaining the income for future investments. But again, income taxes are paid before the wealth is created.
Wealth taxes would reduce an individual’s overall wealth. That would reduce the amount of capital available for the economy to expand. Since ours is a capital-intensive economy, reducing capital reduces economic growth. When that happens, as it did from 2008 to 2016, the slow growth reduces opportunities for the lowest income earners.
That means low-income earners would earn less income. That would worsen income inequality.
There are some instances where wealth taxes are used in place of income taxes.
One example is property taxes that Americans pay to their local government. In this case, the municipality wants to raise tax revenue from residents in order to pay for the services they provide like the public schools, the police department, the fire department and other municipal services.
The local governments generally do not tax income, but rather base a resident’s tax liability on the value of the property owned. This seems to work, but the property tax takes the place of any local income tax.
Americans dream of living a comfortable lifestyle, which is accomplished by contributing to the economy, earning income for those contributions and then saving to accumulate wealth. Taxing wealth which double taxes earned income is simply not fair and discourages people from increasing their contribution.
Fairly taxing earned income makes the most sense to raise revenue. There the income is earned, and the taxes are paid, in the same time period. Taxing wealth would mean that dollars already taxed would be taxed again every year.
That’s simply a bad idea, is counterproductive and is simply not fair.