Wednesday, September 20, 2017
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.