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<div class="timestamp">November 18, 2012</div>
<h1>To Reduce Inequality, Tax Wealth, Not Income</h1>
<h6 class="byline">By
<span>
<a href="http://topics.nytimes.com/top/reference/timestopics/people/a/daniel_altman/index.html" rel="author" title="More Articles by DANIEL ALTMAN"><span>DANIEL ALTMAN</span></a></span></h6>
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<p>
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. </p>
<p>
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. </p>
<p>
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.
</p>
<p>
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. </p>
<p>
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. </p>
<p>
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. </p>
<p>
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. </p>
<p>
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. </p>
<p>
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. </p>
<p>
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. </p>
<p>
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. </p>
<p>
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. </p>
<p>
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. </p>
<p>
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.
</p>
<p>
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. </p>
<p>
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. </p>
<div class="authorIdentification">
<p> <a href="http://www.danielaltman.com/biography.php">Daniel Altman</a>,
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. </p> </div>
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