Why aren’t all taxes wealth taxes?

Tax – like government debt issuance – is really just a means by which a government sterilises the monetary expansion that would otherwise occur when it spends.* But the interesting thing about tax is, of course, the way it can target this sterilisation at different groups and activities. Looking at a tax system gives clues as to what societies consider fairness to be, and what they consider the State to be for. It’s surprising to me that wealth taxes don’t feature more meaningfully.

Advocates of wealth taxes argue that the asset-rich can afford to be more heavily taxed (they are, after all, rich). And pragmatically, wealth can be taxed (in the form of a property taxes at least) because it’s, like, right there.

Opponents see them as pretty much the most unfair form of tax imaginable. Because unless your wealth is inherited (separate blog on this…) you’ve already paid a bunch of taxes on your income en route to it becoming wealth. So wealth taxes would tax already taxed income.

Both sides have good points. They seem to be founded on different ideas about what the State is for. This is a complex subject, but I think all would agree that the State is unique in wielding the monopoly use of violence in society and that it does so (at least in pluralist democracies) to enforce laws that have been collectively arrived at, and to enforce property rights.

For example, when I buy a house, in pops my name on a government ledger next to an address. And the State acknowledging my claim is really very valuable to me because it buys me the State’s protection in support of my claim to exclusive and perpetual use of said house. If anyone bigger and stronger comes to turf me out of my house or take possession of my stuff, that good old State violence comes to my defence. So when I buy a house what am I buying? The house? Or the credible threat (and perhaps reality) of violence on the part of the State to protect my exclusive occupation that I buy in perpetuity? I think this is the same thing.

This outline of the State’s function is pretty crude: it envisages the State as a protection racket, and the social contract as being one in which rich folks buy-off poor folks with hospitals, schools, pensions etc in exchange for them to accept the status quo (eg, not challenge the claims that rich folk have over most of the land, buildings, businesses, debts, and general stuff, and in so doing, allow them to remain rich).

How is this threat of State violence (as well as schools, hospitals etc) paid for? The State as a monetary sovereign can just imagine the money into existence. But if taxes are to be raised (and they probably should be raised) to sterilise this new money, from whom should they be drawn? It doesn’t seem unreasonable to suggest that they should be drawn from those interests that benefit the most from the State’s existence. By supplying hospitals etc as well as police, courts, and prisons you could argue that We’re All in it Together. But I can also see that someone with zero taxable income but billions of property should be paying lots of tax as part of the protection racket. And insofar as wealth correlates with income maybe this is true: the top 1% in the UK do indeed pay something like 30% of the income tax.

So far, so consensus. Our tax system might not usually be explained as above, but I don’t think it is wildly controversial.

However, it is strange that the State pays for the means to enact violence (as well as all those schools, hospitals, etc) by taxing the flow rather than the stock of wealth. If you buy arguments of marginal utility to justify high incomes (which I’m pretty sure I don’t, but most seem to), taxing incomes instead of wealth leans against meritocracy and social mobility, and towards preserving interests many of which have wildly anti-democratic roots. And that to me sounds like a bad thing. So it seems to me that taxes on wealth are more in keeping with the social contract than taxes on income. And I’m not sure I properly understand the argument against.

* Monetary sterilisation is the process of removing one unit of money from circulation for each unit of money added to circulation. Money can be added into circulation through central bank asset purchases (like QE), by the central bank lending to the private sector (like Long Term Repo Operations), or by the central bank lending to its parent (the government). Money can be removed from circulation by swapping it for stuff which is not quite money (like term debt) or by imposing an obligation to surrender it to the monetary sovereign – swapping it for security. The price of security is something nebulous.