A Wealth Tax In Addition To Income Tax?

Tyler Cowen on July 21, 2013 

That is my latest New York Times column, and it starts with this:

IF you’d like to know where American political debates are headed, the data suggest a simple answer. The next major struggle — in economic terms at least — will be over whether taxes on personal wealth should rise — and by how much.

The mathematical reality is that wealth is becoming more important, relative to income. In a new paper, “Capital Is Back: Wealth-Income Ratios in Rich Countries 1700-2010,” Professors Thomas Piketty and Gabriel Zucman of the Paris School of Economics have performed the heroic task of measuring wealth for eight leading economies: the United States, Canada, Britain, France, Italy, Germany, Japan and Australia.

Their estimates reveal some striking trends. For instance, wealth accumulation in these eight countries has risen relative to yearly production. Wealth-to-income ratios in these nations climbed from a range of 200 to 300 percent in 1970 to a range of 400 to 600 percent in 2010. Behind the changing ratios is some bad news, namely that slow productivity growth and slow population growth have depressed income growth, but also some good news — that relative peace and capital gains have preserved wealth.

I would say that we have much become much more efficient in preserving old wealth than in creating new wealth, and this is overall a worrying trend.

I argue that debt to wealth ratios are usually manageable, even in the case of Japan.  The real issue is that politics can make it very difficult to tax wealth and in that sense fiscal problems remain real and are fundamentally tied to governance, not debt to gdp ratios.

Overall I favor consumption taxes myself, for the traditional reasons.  (Alan: The problem with consumption taxes is that the  fabulously wealthy consume very little as a percentage of personal wealth tied to investment. Consumption taxes the poor disproportionately while pretending to have significant impact on wealth sequestration "at the top." See "The Top 5%. It's Not About Income. It's About Net Worth, Stupid!" http://paxonbothhouses.blogspot.com/2012/06/net-worth-of-top-10-its-not-about.html) But with rising wealth to income ratios, governments are sure to look where the money is.  I expect this to be a major battle, as it already is in Italy with the recent debate over the IMU property taxes.

There is much more in the column, you can read the whole thing here.