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A Wealth Tax Is Not The Answer - So What Is?

Tim Worstall, 28 July 2020


The author of this article writes that wealth taxes appeal to the "soak the rich" mindset but make little sense. There is, however, a genuine set of problems around great inequality and solutions that ought to be considered.

The editors at this news service have received several requests to publish articles about wealth taxes in recent years and it is easy to see why. The massive infusion of central bank money after the 2008/09 financial crisis inflated stock and real estate markets, benefiting those able to leverage these assets with cheap money. The process hurt savers and the asset-poor, however.

Besides this “financial repression”, inequality is also widened by owners of certain businesses earning billions by selling services that are not expensive but which generate huge revenues when one taps into billions of consumers. The Big Techs are examples of this. Whether this emerging pattern is right or not depends on one’s political philosophy. If one thinks wealth is ultimately creatable, rather than a zero-sum game (every gainer implies a loser), then inequality per se is not objectionable. 

However, even the keenest defender of laissez faire capitalism might accept that big inequalities pose problems around legitimacy of private property rights and the market economy. It is a lot easier to make capitalism tolerable, even admirable, if a large majority of the public has a decent shot at owning capital.

A writer from the pro-market tradition, but with a keen regard to certain considerations, is Tim Worstall. He takes a look at the proposals for wealth taxes. An American presidential election this November is bound to see new impetus for the wealth tax idea. Tim examines the notion, and has an interesting alternative proposal. 

This article originally appeared in the CapX website and is republished here with permission. The editors are pleased to share this article, and invites reader responses. The usual editorial caveats apply. Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewspublishing.com

Beware confirmation bias - the insistence that this event means that a grand plan must be enacted. It has been a particularly prevalent phenomenon since the start of this pandemic, with COVID-19 being invoked by all and sundry to justify their pet project of choice.

That’s worth bearing in mind when considering these current ideas for a wealth tax. For many of those advocating such a policy, coronavirus is not a reason to enact it, but an excuse for something they wanted all along. The sun coming up in the morning would be good enough confirmation for those people. 

When even the Times [of London] is asking whether this is an idea whose time has come - with exactly the COVID-19 justification - it is necessary to kick back.

The standard economic argument against wealth taxes is not just “no” but “hell no”. The reason being is that we like investment, as it is what makes our future lives that much richer. We also know that taxing something means getting less of it. So, taxing wealth - the result of investment - is to make the future poorer.  That is how the optimal taxation theory result is reached - there should be no taxes upon either capital or the income from capital. It was actually the left-wing US economist Joe Stiglitz who showed, back in 1980, that the correct tax level could be negative.

Of course, large numbers of people don’t like this result and very much like the idea of “soaking the rich”. So, they look for reasons to bypass the obvious objections.

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