Giving preferential tax treatment to a privileged class of citizens violates the principles of both democracy and capitalism. An annual levy on wealth over $250,000 could begin returning us to core principles.
By Douglas Hopkins
The most interesting examination of economics over the last three decades has been Thomas Piketty’s Capital in the 21st Century. But hardly anyone has taken Piketty’s policy proposals seriously, mainly because Piketty himself framed them as overtly redistributional and described them as utopian.
In America today, arguing in favor of redistributional taxes on wealth may be factually, logically, and even morally supportable — but such arguments are counter-productive. Confiscatory tax policies pose a lethal threat to the rich and powerful, demanding their aggressive resistance.
Redistributional policies also hold little appeal to the American voting public. Who among us really wants to go to war against a class we all aspire to join? Even progressives, who often embrace and utilize redistributional rhetoric as part of the inequality debate, have largely dismissed Piketty’s proposed wealth tax.
But Piketty nearly got it right. A properly structured annual wealth tax could equalize effective tax rates between labor and capital, while simultaneously stimulating more productive capital allocations — and, in the process, job creation.
Shielding wealth from direct taxation distorts investment incentives. If the productive deployment of capital serves as a key driver of economic growth and prosperity, then our policies should carefully aim at encouraging productive domestic investment. But by taxing investment profits, while shielding wealth itself from any direct assessment, we are subsidizing unproductive capital.
By taxing productive capital more heavily than unproductive capital, we encourage income sheltering and suppression and overburden the kind of job-creating productive domestic investments that create a growing and healthy economy.
Structural preferences aimed at wealth have, in effect, made tax avoidance and valuation manipulation more profitable than productive enterprise. Repealing the inefficient, highly variable, often contradictory, and much-abused taxes currently imposed on investment income and replacing them with an assessment directly upon accumulated net wealth would remove the distorted incentives that are undermining our productive economy.[pullquote]By taxing productive capital more heavily than unproductive capital, we encourage income sheltering.[/pullquote]
An even-handed, moderate annual wealth tax would stimulate an aggressive redeployment of capital in search of more productive opportunities — and trigger a massive stimulus investment program financed entirely with private capital.
Specifically, I propose we should take two key steps:
Reduce the top marginal tax rate on earned income — wages and salaries — to 25 percent, including all Social Security and other employment taxes, a move that would increase disposable income from labor and stimulate the consumer spending that constitutes over two-thirds of GDP.
Replace all current corporate income and personal investment and estate taxes with an annual tax on net accumulated wealth in excess of $250,000, taxing the earnings potential of this wealth at an effective rate equal to the same 25 percent.
If we assume an average available return on investment target of between 6 and 8 percent, a 25 percent income tax rate would be equal to a 1.5 to 2 percent annual tax on net wealth. Such a tax would dramatically narrow our budget deficit while stimulating more productive capital allocations, economic prosperity, and job creation.
It may be difficult for many on the left to accept a mere equalization of tax rates between labor and capital as an adequate goal. Many liberals treat any challenge to progressive tax rates as heresy, an unfortunate attitude because the democratic ideal of equal treatment remains a far more powerful motivating principle — at least in the United States — than redistribution.
Moreover, America’s current progressive tax policies, although highly lauded from the left, amount to more illusion than fact and significantly contribute to the dysfunction of our public debate.
Yes, U.S. federal income tax rates are progressive, so much so that they often inflame rabid emotional resentment. In our last presidential election, for instance, the conservatives rallying cry became “47 percent of the population pays no tax!” But the “progressive” federal income tax represents only one third of our total national tax burden, and the bulk of the other two-thirds continues to be quite regressive, as are the benefits that come from current investment tax shelters and deferrals.[pullquote]Supporters of the preferential tax treatment of capital have been largely impervious to moralist arguments about increasing inequality.[/pullquote]
Modern tax policies biased against consumption and earned income have been redistributing wealth and income upward from the working middle class to the privileged and powerful. Our contemporary economists and politicians claim that the structural tax preferences we offer to our investment class drive economic growth and job creation. But our increasingly unstable economy and rising inequality stand as a stark indictment against their myopia.
Our leaders today blindly ignore structural misincentives embedded in our tax code that divert capital from productive deployment while simultaneously depleting our treasury of needed revenues.
Conservative economic theorists who support the preferential treatment of capital have shown themselves to be largely impervious to moralist arguments about the increasing inequality created by those preferences. But they are vulnerable to challenge on the grounds of efficiency that sit at the heart of capitalist theory. If we want to stimulate economic growth and prosperity, we need to remove the misguided structural shelters that currently subsidize unproductive capital. A modestly conceived annual wealth tax offers an opportunity to do so while conforming closely to principles of both democracy and capitalism.
Douglas Hopkins currently serves as the president and managing principal of Kestrel Consulting, LLC. The co-author of Crafting Solutions for Troubled Businesses, Hopkins has over 30 years experience in management and business reorganization. For a more a more expansive discussion of the issues, arguments, and proposal described in this article, see The Case for Replacing Investment Income Taxes with an Annual Wealth Tax in the June 15, 2015 Tax Notes. Download from SSRN.