The proposal of a new tax is typically met with indifference, outrage, or something in between. So it is perhaps surprising that, in the national press, Alexandria Ocasio-Cortez and Elizabeth Warren have both recently won wide praise from liberals and leftists by proposing a new federal wealth tax. You might worry that this enthusiastic reception is driven by mere resentment and class antagonism, rather than a considered appreciation of the tax on its merits. (I think we’re about due for a little more class antagonism, but that’s neither here nor there.) Whatever you think of supporters’ motives, though, wealth taxes are worth considering on the merits. In particular, it’s worth asking whether wealth taxes are superior to income taxes.
I won’t make you wait for the answer: they are. And if this is right, New York City and State should go further than AOC and Warren’s proposals – wealth taxes should replace their income taxes altogether.
In the 2017-2018 fiscal year, New York State collected more than two thirds of its tax revenue from personal income taxes. In the same year, the city collected a smaller, but still quite substantial, 18% of its tax revenue from personal income taxes.[1] They would have been better off collecting wealth taxes, for a few reasons.
First, wealth inequality drives political inequality, and wealth taxes lower wealth inequality more effectively than income inequality. The wealthier you are, the greater your power to mold public institutions and public policy in your own interests. And the wealthier you are, the less your interests align with those of the rest of society. So the greater the wealth inequality in a society, the greater the divergence between its actual institutions and those which would most benefit its members.
Second, wealth inequality is bad, in a nutshell, because of the diminishing marginal utility of money. The more money you have, other things being equal, the less you get out of having additional money. Perhaps some wealth inequality is necessary for instrumental reasons, but in the absence of such an instrumental reason, any dollar in a rich person’s pockets would do better elsewhere.
The third advantage has to do with the effective use of wealth. Wealth taxes provide an incentive for wealth-holders to convert their wealth and income into things that are not themselves wealth. One way to do this is to give to charity, which (if the charity is effective) is better for the world, and perhaps better for wealth-holders themselves. Another way to do this is to spend money on experiences, which is, in general, more conducive to happiness than spending the money on taxable wealth itself.
In short, wealth accumulation is a kind of vice, but unlike other vice taxes, a wealth tax could be used to generate significant revenue.
What about income taxes? The major disadvantage of an income tax is, in effect, that it creates a perverse incentive. An income tax is a reason not to earn income. Of course, earning income is not coextensive with doing good for the world – think of high-speed trading of stocks and other financial instruments, on the one hand, and the failure of private industry to pay people to do the most important jobs there are to do, on the other. But income often does reflect socially useful work – teachers, doctors, childcare workers, janitors, plumbers, and so on. To the extent that income is at all positively correlated with pro-social activity, a tax on income is, in part, a tax on pro-social activity.
One concern about wealth taxes is that they wouldn’t bring in enough revenue. In New York City, though, it’s pretty easy to see that this is false. In 2018, there were 978,810 millionaires in the city. Assuming all of them have a net worth of one million dollars (and they have a lot more than that), a 1% tax on this group’s net worth alone would have brought in $9.8 billion. The city brought in about $11 billion in income tax revenue during this time.
Another concern is that wealth is harder to measure than income. This is true. If we measure wealth in terms of net worth, a person with an enormous amount of cash and even more enormous debts on paper (Jérôme Kerviel comes to mind) is poorer than, for example, a debt-free adjunct philosophy professor with a near-empty bank account. This is absurd – partly because we typically think of wealth as something like the ability to purchase things, partly because debt doesn’t mean the same thing for an ordinary person as it does for someone with the resources to successfully navigate bankruptcy proceedings or negotiate meaningfully with their creditors. In any case, I won’t attempt to offer a better measure of wealth here. Still, if we can agree on counterexamples to the current measure, and on why, broadly, they are counterexamples, we have some reason to believe that we could improve on it.
Lastly, a wealth tax would create an incentive to hide wealth from the government – say, by storing it overseas, or out of the banking system, or in assets that the government doesn’t know about. Now, income taxes create a similar incentive to underreport income, but the effects of hiding wealth are arguably worse, because they encourage the removal of wealth from the formal economy altogether. Again, I don’t disagree. It’s true that an effective measure of wealth would require tax agencies to keep better track of taxpayers’ assets than they currently do, and that this will take real work. But I don’t think this is a really compelling reason not to levy a wealth tax. First, some, and perhaps most, of the work involved in assessing wealth would be offset by no longer having to keep track of individuals’ income. Second, this work is worth doing for quite independent reasons – namely, that society would be better off if there were more transparency about the nature of the assets of the wealthy. Sunlight, disinfectant, etc.
Of course, wealth taxes will be unpopular among the wealthy, who have an outsized influence on city and state government. Many of them are also existentially committed to keeping the nature and sources of their own wealth secret. So this would be a politically difficult reform. But if national politics is any indication, an enterprising politician, allied to the right sources of public support, could make it a reality.
[1] It’s worth noting that the city collects more tax revenue from property taxes than any other source, and property taxes are a sort of wealth tax. But importantly, property owners often defer their tax costs to tenants and consumers. This is harder to do with a tax on total wealth.
Mr. Olasov is a doctoral student in philosophy at the CUNY Graduate Center and teaches philosophy at Brooklyn College. He organizes Brooklyn Public Philosophers, a monthly philosophy speaker and discussion series for a general audience. You can read some of his writing for a general audience at Slate, Vox, and Public Seminar. He is Brooklyn born and bred.