TaxProf Blog

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Pepperdine University School of Law

Wednesday, September 20, 2017

Glogower Presents Progressive Taxation Of Income And Wealth Today At Northwestern

Glogower (2016)Ari Glogower (Ohio State) presents Progressive Taxation of Income and Wealth today at Northwestern as as part of its Advanced Topics in Taxation Workshop Series hosted by Sarah Lawsky:

Rising economic inequality has led commentators to reassess the base for progressive taxation, and to argue that wealth should be taxed in addition to, or instead of, income. This Article claims that, if income and wealth should both be periodically taxed as factors in economic well-being, then taxing an integrated measure of both factors is preferable to taxing income and wealth under separate instruments. Separate income and wealth taxes cannot consistently compare taxpayers on the basis of their total economic well-being during the taxing period, and will favor or disfavor taxpayers depending whether their economic well-being results from income, wealth, or a combination thereof.

This argument has additional implications for the choice between taxing wealth and income, and the limitations of both. From the perspective of a periodic tax on economic well-being, a wealth tax is not replicable by a tax on capital income earned from wealth. A wealth tax that accounts for a taxpayer’s entire stock of wealth each period overtaxes wealth holders relative to labor income earners, whereas a capital income tax under-taxes wealth holders relative to labor income earners. Finally, from this perspective wealth does not factor equally in each taxpayer’s economic well-being, which will vary with the number of periods over which the wealth must be spread.

After describing the limitations of separate taxes on income and wealth, this Article introduces a new base for progressive taxation, which is an integrated measure of economic well-being from both income and wealth. This approach first recharacterizes wealth and capital income as an annuity value (the “wealth annuity”), reflecting both capital income earned during the period as well as a portion of the taxpayer’s wealth principal. The wealth annuity is then added to the taxpayer’s labor income for the period, to yield an integrated measure of economic well-being. This integrated measure allows the tax system to compare taxpayers with different levels of income and wealth, and conforms to theories of how economic inequality causes social and political harm.

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Consider that, for the average American with significant wealth, their net worth is tied up in their home and retirement plan. Their house is taxed annually as it is, at the county level, via a property tax in most states. And for most Americans still working with a retirement plan, that can't be touched in most cases without hefty tax penalties.

So, would not a wealth tax on the average American merely discourage home ownership and saving for retirement?

Posted by: MM | Sep 20, 2017 7:59:48 PM

@ MM: Usually solved with a general deduction eliminating wealth tax for all but the wealthiest x %, where x is a question of policy.

Posted by: GSo | Sep 22, 2017 12:30:36 AM

I speak for most sensible Americans when I say that I favor such a tax as long as GSo's x is north of where I or any of my descendants will ever be.

Posted by: Mike Petrik | Sep 22, 2017 8:37:37 AM

Gso: So, basically an estate tax every year, instead of one that kicks in when somebody checks out?

Hey, on the 1% of income earners, that's fine by me. When you expand it to the top 20% of households, who already pay ALL net federal taxes, they WILL change their behavior. Leveraging real estate, margin loans, etc. are a great way to reduce one's net worth, and avoid such a tax...

Posted by: MM | Sep 22, 2017 7:46:10 PM