[Vision2020] To Reduce Inequality, Tax Wealth, Not Income

Art Deco art.deco.studios at gmail.com
Mon Nov 19 08:48:28 PST 2012

  [image: The New York Times] <http://www.nytimes.com/>

November 18, 2012
To Reduce Inequality, Tax Wealth, Not Income By DANIEL

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 <http://www.danielaltman.com/biography.php>, 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.

Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
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