Friday, May 8, 2020
John H. Cochrane (Hoover Institution), Wealth and Taxes:
Wealth inequality has become a heated political issue. Politicians claim that wealth concentration is rising and that people at the top are gaining at other people’s expense. In this study, I examine problems with the measurement of wealth and discuss whether wealth inequality is an issue that public policy needs to address. I also consider the likely effects of wealth taxation. I concur with views from the left that political rent‐seeking should be curtailed and that finding economic opportunities for less‐fortunate Americans is important. But I argue that a new system of wealth taxes is more likely to hurt rather than help those goals.
Section 1 discusses how measuring the wealth distribution from capitalizing income flows produces deeply misleading results.
Section 2 shows how some measures of wealth inequality have risen in recent years due to falling interest rates and rising asset prices. Those developments do not make people better off in terms of resources available for consumption, which reinforces the conclusion that wealth inequality is not a useful concept above and beyond consumption or income inequality.
Section 3 examines the distinction between consumption, income, and wealth inequality. Market wealth is a poor indicator of well‐being; it ignores taxes and transfers and thus inflates measured inequality. Top‐end wealth is mainly in the form of business assets, which are used to employ people and produce the economy’s output.
Section 4 describes why wealth taxes are a poor way to raise revenues, as they would undermine growth and generate large‐scale tax evasion. Consumption taxes are a better revenue source.
Section 5 examines how support for wealth taxation has less to do with economics and more to do with politics. Economists Emmanuel Saez and Gabriel Zucman, for example, argue for wealth taxes in order to confiscate the wealth of billionaires who they believe have too much political power. I argue that a wealth tax would produce more cronyism and inequality.
I conclude that wealth inequality is not a useful measure, especially of economic problems facing Americans who are less well off, and that wealth taxation would cause major economic and political damage.