The Case for Replacing Investment Income Taxes with an Annual Wealth Tax

Abstract

The tax reform debate in America is largely framed as a conflict of competing principles rather than shared goals and the resulting politicized power struggle has left us blind to a critical flaw in fiscal policy: Structural preferences that shelter wealth from direct taxation are subsidizing unproductive and illiquid capital, thereby distorting investment incentives and obstructing sustainable economic growth and job creation. Those preferences are both inefficient and inequitable, contrary to core principles of both democracy and capitalism.

A properly designed annual wealth tax could facilitate removal of those preferences and serve as the cornerstone element of simultaneously more equitable and efficient comprehensive tax reform: a) stimulating more productive investment and thereby job growth, while allowing us to b) equalize effective tax rates between labor and capital, and c) lower the maximum marginal tax rate to 25%.

The most direct way to both stimulate our productive economy and restore the American Dream is to reduce the marginal tax burden imposed upon earned income. Increasing the take-home pay of the working class would both stimulate personal consumption which constitutes over 2/3 of GDP, and facilitate savings among the portion of the population which otherwise places demands upon our social services programs.

The most efficient way to stimulate productive domestic investment is to equalize the imposed burden upon all investible capital; removing misguided structural tax preferences toward illiquid and unproductive assets would trigger a rapid and aggressive redeployment of private capital. If 3% of the nation’s $97 Trillion national wealth were redeployed it would unleash a $3 Trillion stimulus program funded entirely with private capital.

Keywords: Annual Wealth Tax, AWT, tax reform, investment income taxes