Wealth and Taxes

13 Pages Posted: 28 Apr 2020

See all articles by John H. Cochrane

John H. Cochrane

Hoover Institution; National Bureau of Economic Research (NBER); University of Chicago - Booth School of Business

Date Written: April 2, 2020


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.

Keywords: wealth inequality, taxes, economics, wealth distribution, consumption, income, wealth tax, tax evasion

JEL Classification: I00, I3, I30, I39, K34, H2, H20, H21, H24, H25, H29

Suggested Citation

Cochrane, John H., Wealth and Taxes (April 2, 2020). Cato Institute, Tax and Budget Bulletin No. 86. Available at SSRN: https://ssrn.com/abstract=3567365

John H. Cochrane (Contact Author)

Hoover Institution ( email )

Stanford, CA 94305-6010
United States
6507236708 (Phone)

HOME PAGE: http://faculty.chicagobooth.edu/john.cochrane/index.htm

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-0458 (Fax)

HOME PAGE: http://faculty.chicagobooth.edu/john.cochrane/research/Papers/

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
PlumX Metrics