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.

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7 thoughts on “Why aren’t all taxes wealth taxes?

  1. Agreed.Untax flow and tax stock.

    The taxing of income producing assets would limit speculative investment reducing runaway price inflation.And In turn shore up financial stability which can be undermined by debt fuelled asset bubbles.

    The taxing away of the economic rent of land through a land value tax is surely the most sensible,fair and logical form of taxation.

    • Very interesting the concept you discuss in paragraph regarding the state’s protection of property rights. As a young (mid twenties) but relatively high earner I think this sums up one of the sources of my frustration.

      In the past few decades higher earners did foot most of the bill however they also enjoyed the highest quality of life and saw a relatively continual improvement. However I see this correlation between income and wealth gradually breaking down as older property owners retire and younger student-debt laden people come in at the bottom. As part of this trend it leaves me feeling like I’m getting a bit of a raw deal, as a net tax contributor neither am I getting the public services I pay for nor am I given the platform to build a stable future.

  2. doesn’t wealth / savings deliver some benefit in its deployment as credit or money capital? some slice of that beefy rent can be done without, but at least the landlord guards against invasion and dilapidation, no?

    higher land value taxes / property taxes seem useful, but what about more taxation of bad flows? more carbon tax (which bundles noisy car tax, traffic jam tax, sheikh sponsorship tax, rubbish air quality tax, and sprawl tax with a bid to preserve the only medium-term viable planet from adverse modification), and more indenturement / continuous levy of those criminals who can be kept from rampaging by GPS anklets and ex-work house arrest would seem to charge premiums to the most serious claimants on the public goods furnished by the state

    if we’re restricted to taxing goods, like factors of production, then maybe the most fair arrangement includes is substantially burdensome from capital, but I don’t c that our bad behaviors are yet overpriced, and I don’t see UK labor decamping for Luxembourg

  3. Pingback: Policy making in an Elysium scenario | principlesandinterest

  4. A problem with wealth taxes is that they hurt the asset rich and income poor. As an extreme example It wouldn’t be fair in my mind for a London banker to enjoy tax free employment income of £5m per year while an asset rich home owner on a state pension has to re-mortgage his house just to pay his annual wealth tax bill. Asset accumulation is the normal way that people prepare for a time when they can no longer earn labour income. Eroding people’s assets through wealth taxation will lead to their greater dependence on the state in later years. Instead we should be encouraging financial independence and that means making it easier for people to accumulate wealth not harder!

    • Surely the answer to that problem is exactly the same as we do with taxing income: you only start taxing assets above a certain rate of wealth. So you can accumulate wealth untaxed up to whatever amount society deems is good for a comfortable retirement and then you’re taxed on wealth above that amount.

      Your example of the banker doesn’t make much sense because unless they blow all of that £5m on perishable goods and services (unlikely but good for the wider economy if they did) then they will have to invest the money in assets or retain it as cash and will then be taxed on the resultant wealth in the following year.

  5. Obviously, historically income has been taxed much more heavily than wealth. To switch from a system of income taxation to a system of wealth taxation in its place seems to me to require that there will be a generation that pays taxes both on the income used to accumulate wealth before the switch, and then again on that same wealth after the switch. That generation will be old and active at the ballot box – politically, its staunch protests are likely to drown out what support there is among others, given the new system would not be a tax cut for them on the whole. There could be phasing in and exemptions, but those are likely to spread the double taxation over more generations or have cash flow consequences for government respectively. Getting from one system to the other politically is the problem, not that the new system would not make much more sense economically.

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