When the decline and fall of the American empire is chronicled by future historians, the role played by a small cabal of radicalized multi-billionaires, taking control of the media to spew disinformation, unlawfully interfering in government operations, raving about the anti-Christ, and buying pardons from a corrupt president to avoid punishment for their criminality, will figure centrally in the account.
asserted
role → chronicle → account
Even among those who don’t begrudge these men their wealth, many would still be relieved if they could behave themselves somewhat better.
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they → begrudge → themselves
Luckily, there are at least a half-dozen sensible reforms that could be undertaken in the United States that would significantly reduce the severity of the problem.
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that → be → problem
Unfortunately, these sensible reforms require at least five minutes to explain, as a result of which they have no chance of being adopted in the current political environment.
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they → require → environment
Progressives have therefore begun to rally around a much simpler plan: wealth taxes.
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Progressives → begin → plan
On the merits this is a terrible idea, but it has the advantage of being extremely easy to explain: billionaires are bad, so let’s take away their money!
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’s → have → money
Wealth taxes are in fact a perfect example of slopulism—policy ideas that make for quick, effective sound-bites, but that are almost universally rejected by experts.
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that → make → experts
The reason that tax experts disdain wealth taxes is, unfortunately, a bit difficult to explain.
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experts → disdain → taxes
The main problem is not that billionaires will pick up stakes and leave.
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billionaires → pick → stakes
There is nothing that can be accomplished by taxing wealth that cannot also be accomplished by taxing capital income.
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that → be → income
And yet we already have a tax on capital income.
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we → have → income
So instead of creating a new, administratively complex tax on wealth, involving completely new reporting requirements, we should just modify the existing income tax system to accomplish whatever objectives we might like to achieve with a wealth tax.
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we → create → tax
Specifically, calibrated changes to the treatment of capital income and/or inheritance taxes in the United States would be sufficient to address many of the problems that have been highlighted by proponents of wealth taxes.
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that → calibrate → taxes
One of the reasons that public opinion on the subject is so poorly informed is that most people don’t understand what wealth is, or what it would mean to tax it.
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it → understand → it
Part of the reason it’s confusing is that we are accustomed to thinking about taxation in terms of the income tax, and income is a flow, whereas wealth is a stock.
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wealth → ’ → tax
In order to illustrate the distinction, economists typically use the analogy of a bathtub being filled, where the water coming out of the faucet constitutes the flow into the tub (and must be measured in terms of its rate, quantity over time), whereas the water that has accumulated in the tub constitutes the stock (which can be measured as a simple quantity).
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which → illustrate → quantity
The bathtub analogy makes it easy to see how wealth is already subject to taxation in our society.
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wealth → make → society
It appears otherwise only because we tax the flow of capital, not the stock.
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we → appear → capital
When you earn income, you must pay taxes on it, regardless of whether you spend it or not.
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you → earn → it
This means that all savings are taxed (i.e. the water is taxed as it flows into the bathtub).
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it → mean → bathtub
What proponents of wealth taxes are saying is that, in addition to taxing the flow of water into the bathtub, we should perform an additional calculation, every year, of the water level in the bathtub, so that we can impose a tax on that.
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we → say → that
What additional objective could be achieved by taxing the stock directly that could not be achieved indirectly by taxing the flow into the tub?
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that → achieve → tub
There is, I will grant, an important disanalogy between wealth and water in a bathtub, which is that wealth grows over time, without any additional input of savings, unlike the water level in a tub, which cannot increase unless you specifically add more water to it.
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you → be → it
In some cases this is because an asset earns a return, in other cases because its market value increases.
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value → earn → cases
One might think that this factor provides an argument for taxing the stock of money, rather than just the flow.
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factor → think → money
In reality, however, what it provides is just an argument for treating the increase as income and taxing it appropriately.
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provides → provide → it
This is why, under the existing system, all of the income derived from wealth (dividends, interest payments, and capital gains) must be declared as income, which generates a tax liability.
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which → exist → liability
Again, we tax the flow, not the stock—any increase in the water level is taxed as income.
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increase → tax → income
This treatment of capital income provides one of the most long-standing points of contention about the income tax, which is that it has the effect of subjecting savings to double taxation.
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it → provide → taxation
Progressives generally regard this as a feature of the system, not a bug, because it discourages large concentrations of wealth.
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it → regard → wealth
Unfortunately, it also has the unwanted effect of penalizing ordinary people who choose to save—not to get rich but just to maintain their standard of living during retirement, to purchase a home, and so on.
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who → have → home
In order to avoid this problem, various modifications to the income tax system have been made that exempt ordinary savings from one of the two rounds of taxation.
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that → avoid → taxation
(In the United States, the selective exemption from one round of taxation can be seen most clearly in the difference between an ordinary IRA, which allows one to avoid paying the upfront tax on savings, but commits one to paying tax on the accumulated capital income, and a Roth IRA, which requires one to pay the upfront tax, but exempts one from tax on the capital income.
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which → see → income
Because of this, middle-class Americans who use their savings to accumulate home equity and build a nest egg for retirement are essentially exempt from one of the two rounds of taxation on savings.
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who → use → savings
By contrast, Americans who are rich enough to pay off their house and max out their retirement accounts, leaving them with excess financial assets, wind up having their capital taxed twice, once when the income is earned and again on the flow of income that it generates.
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it → pay → that
What proponents of a wealth tax are now suggesting is that these assets be subject to a third round of taxation.
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assets → suggest → taxation
One might be tempted to question the fairness of such an imposition.
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One → tempt → imposition
But it doesn’t even matter, because whatever the effects of this third round of taxation, they can easily be undone just by changing the rates of taxation on the previous rounds.
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they → matter → rounds
It’s the same goose being plucked at each stage, so it doesn’t really matter how much gets taken in any particular round.
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much → ’ → round
The most important objection to wealth taxes is that they impose very complex reporting requirements involving often difficult-to-value assets (e.g. how should Jeff Bezos’s new yacht be treated? Or to pick a famous European example, what is control of IKEA worth?), while not accomplishing anything that is not already being done by the income tax.
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that → impose → tax
…and 52 more, not listed.
