4 Pages Posted: 14 Jun 2019 Last revised: 30 Sep 2020
Date Written: September 25, 2020
Political candidates on the left commonly propose an annual tax on wealth. There are lots of difficult questions associated with a wealth tax. For example, what counts as wealth and how is it measured? I put these important issues aside to focus on three simpler but central issues.
(i) Since the wealth tax is annual, it amounts to a tax on the annual payoff (interest, dividend, rent) from an asset. In this sense, a wealth tax is just an extension of the annual income tax.
(ii) A wealth tax that is a small fraction of the price of an asset is typically large relative to the asset’s annual payoff. As a result, a wealth tax can have a large effect on asset prices. The price effects increase the cost of capital, which deters investment in productive assets and so lowers future tax receipts.
(iii) Capital losses on assets due to wealth taxes hit poor and rich asset owners, even if the wealth tax is only imposed on the rich.
JEL Classification: H20
Suggested Citation: Suggested Citation