5 Ways a Wealth Tax Is At Least as Bad as an Income Tax

Governments will be free to assign their own prices and values — and impose taxes accordingly

Image Credits: Images Money / Flickr.

There has been an increasing push for wealth taxes as of late.

Supporters for new and larger wealth taxes contend that as the population ages, there won’t be enough wage earners to fund the public purse. In other words, there will be less wage-based income to tax as time goes on. But there will still be plenty of pensioners to pay for. As The Guardian noted back in March, new revenue sources will be needed “as the number of people over 65 grows by almost a third, while the working age population is expected to only increase by about 2%.”

Thus, The Guardian concludes: “the time has come to make the case for greater wealth taxes, given our emerging economic realities, demographic shifts and growing levels of inequality.”

Moreover, a wealth tax is seen as a more progressive and fair way of taxing high earners while saving middle and working class earners from paying excessive taxes or fines.

It won’t be surprising if we hear ever-louder calls for a wealth tax — in both the US and the UK — as the pool of current wage earners grows smaller and smaller.

But taking a further look into the issue, and applying some common sense logic, it becomes clear a wealth tax brings with it a host of problems.  Many of these problems are reminiscent of the problems we already encounter with a wealth tax. But some are new:

One: The Audits

As with the income tax, the privacy of individuals suffers under a wealth-tax regime. With income taxes comes institutions like the IRS and Her Majesty’s Revenue and Customs department (HMRC). And with those come investigators looking to find those who have undeclared income that “should” have been taxed. Government have already developed a variety of ways of tracking the income of individuals. To do the same with wealth would involve an additional wealth-surveillance scheme. Potentially, this would require a sizable bureaucracy needed to calculate the value of each person’s wealth, even including dormant “wealth” that doesn’t even produce any usable income for the owner. This could even include physical wealth like gold and silver bullion. But how to know how much of this wealth everyone has? Random searches by government officials might be necessary.

Two: Asset-Price Inflation

The next issue is that of asset-price inflation. Although not all assets experience inflation to the same degree in an environment of easy money and money-supply inflation, many assets will see their prices increase in monetary terms. This could happen without similar increases in wages and income, thus resulting in higher tax bills without higher incomes. Housing is an example of this, and we have seen in come cases that housing prices have increased at twice the rate of inflation and wages.

Three: Punishing Successful Businesses

Businesses will also be heavily affected by this tax, as any small business owner who owns a physical shop and a home will be now liable for a tax on various types of wealth. This could also mean greater taxes on companies that own more automobiles or other plant equipment. In other words, those businesses that do well by serving their customers well will be rewarded with a higher tax bill.

Four: Stifling Upward Mobility

All of these issues meld together into a central point: a wealth tax will not only be incredibly intrusive to the individual and damaging to businesses, but will also harm the middle and working classes much more than the wealthy it is supposed to target. As we have so often seen with government regulations and taxes in general, it is the wealth and the most well-capitalized firms that can wealth higher taxes. Those firms and households that are on the margins will have the hardest time paying their taxes and dealing with the limitations imposed by higher taxes. After all, not all wealth accumulates interest or produces usable income on a reliable basis.

Those who newly inherit wealth might be the hardest hit as they would need to find ways to immediately convert wealth into income in order to pay their tax bills.

Five: Defining Wealth

And finally, there is the issue of defining wealth. Unlike income, which almost always can be easily counted in dollars or pounds, wealth is harder to calculate.

As we already see with property taxes, the “value” of the taxed asset must often be calculated by a government assessor or some sort. And that value is then used to calculate the tax. How will this method be extended to personal physical wealth, and to assets which have not been recently sold or bought and thus have no market price attached to them? Governments will be free to assign their own prices and values — and impose taxes accordingly.