Paul L. Caron

Tuesday, January 14, 2020

Cato: Taxing Wealth And Capital Income

Chris Edwards (Cato Institute), Taxing Wealth and Capital Income:

Taxing the wealthy is a hot issue among Democratic candidates for president. Sen. Elizabeth Warren (D-MA) is proposing an annual wealth tax on the richest households, while other candidates are proposing higher taxes on incomes, estates, capital gains, and corporations.

Calls for tax increases are animated by claims about the fairness of income and wealth distributions in the economy. Warren wants to address “runaway wealth concentration,” while Sen. Bernie Sanders (I-VT) says that the wealthy are not “paying their fair share of taxes.”

The proposed tax increases run counter to the international trend of declining tax rates on capital income and wealth. The number of European countries with a Warren-style wealth tax has fallen from 12 in 1990 to just 3 today.

The Europeans found that imposing punitive taxes on the wealthy was counterproductive. Wealth taxes encouraged avoidance, evasion, and capital flight. In most countries, wealth taxes raised little revenue and became riddled with exemptions.

This study discusses why targeting wealth for higher taxation is misguided. Wealth is simply accumulated savings that economies need for investment. The fortunes of the richest Americans mainly consist of active business assets that generate jobs and income. Increasing taxes on wealth would not help workers, but instead would undermine productivity and wage growth.

Basic economic theory suggests that taxes on capital should be low, and that conclusion is strengthened by the realities of today’s global economy. Furthermore, wealth taxes are even more distortionary than current federal taxes on capital income.

Nonetheless, taxing capital in a fair and efficient manner is a challenge. This study argues that the best approach would be a consumption-based tax system. Such a system would tax capital income but in a simpler way that does not stifle investment and economic growth.

Scholarship, Tax, Tax Scholarship | Permalink


The notion that taxing capital gains as ordinary income would adversely affect "investment and economic growth" has been discredited time and again. It's one of those ideas that Krugman refers to as "zombies": they simply refuse to die.

In the first place: Only a tiny percentage of stock trading has anything whatever to do with investment. It's simply one person or institution buying another person's or institution's shares.

Posted by: Gerald Scorse | Jan 14, 2020 8:43:27 AM

@Gerald Scorse. But it is the Cato Institute, so that old chestnut will never die. And of course, the author proposes a consumption tax, one of the favorite ideas that lets the wealthy pay even less tax.

Posted by: Oliver Buckley | Jan 14, 2020 2:12:19 PM