Evaluate the effectiveness of a wealth tax in fighting inequality.

 

A wealth tax is a tax on high value assets, high incomes, or luxury goods. The premise of the tax is that this can reduce the gap between the rich and the poor either by making the rich less rich, or by doing that and then redistributing money to the poor, thus narrowing the gap between the rich and poor.  The rich are poor and the few are many, however. An attempt to greatly reduce the wealth or incomes of the rich may simply encourage the rich to leave a country or to avoid the taxes with the help of accountants or lawyers. This would complicate efforts to collect the tax, and may actually mean that the tax was inefficient, because it collected less than it cost to operate. If a government were to take tax from a small number of individuals and then give a small portion to a large number of poorer people, the effect might be temporary and might not really affect incomes overall, as it could be spent on debt, inferior goods, or imported cheap goods.

In addition, taxes tend to disincentivise enterprise and small business, and can be subject to government failure and moral hazard. A government must therefore decide why it wishes to reduce inequality, and where it believes inequality to come from.

For example, if the problem is that a small number of people are rich because they sit on top of patents, copyrights, or enterprises which are purchased because they add to productivity, a small tax on that money might not be noticed by the rich. It would not, however, ‘solve’ poverty; instead it would add to government revenues and could be used to provide public or merit goods which offer life chances to poorer individuals. If the problem is that goods and services like housing, healthcare, or education, cannot be accessed by the poor because corporations have bought them all and are charging high prices, state provision of those goods might be a preferable social alternative to taxing the rich or businesses.

There is an argument that ‘absurd’ wealth gaps arise because the rich hold assets and the poor have paper money but no unions. If the poor could bid up incomes through wage negotiations, with money supply expanding to cope, the fall in rich incomes from fixed assets because of inflation, and the rise of poor purchasing power because they could raise their pay more quickly, might be a temporary way to narrow gaps. Ultimately, however, inflation destroys investment, capital, and jobs, which hits the poor hardest.

States might consider the effect of inheritance taxes on inequality and poverty. If, rather than disincentivising wealth accumulation for individuals, States simply taxed the money after death, or limited the amount that individuals could inherit, this may prevent the accumulation of capital in fewer and fewer hands across generations. One powerful incentive for wealth accumulation is to pass on money and wealth to children and survivors, however, so this again may be a difficult tax to impose.

If the basis of wealth is land, from which the rent gain rents and increases in land value to borrow against, a tax on land which was banded or limited in its effect on the poor could have the result of limiting gains and encouraging constant division of land and sales, which could limit inequality. Such a policy would, however, make it difficult to borrow against the land, might initially raise rents as the rich try to accommodate the new taxes (thus hitting the poor) or could encourage complicated avoidance schemes.

Highly regulated economies do tend to have lower gaps between the rich and poor than ones where big companies and the rich are free to accumulate large sums. This sometimes comes at the expense of living standards in the sense that goods in regulated economies tend to be in shorter supply and to be more expensive. As there is a lack of investment capital in such societies, they also tend to be less innovative and more damaged by shocks from outside, as well as having higher structural unemployment.

Ultimately, the best guarantee against gaps between rich and poor becoming unbearable is an economy that encourage worker mobility, occupational education, jobs, small business growth, exports, and steady real interest rates and taxes in regulated but competitive markets. Some inequality is an incentive in such societies. Such societies tend to be able to provide the money via modest taxation to pay for public and merit goods, and to be innovative and dynamic.

It follows that an alternative to wealth taxes, or a complement, might be tax incentives, cuts, or allowances for small businesses and the poor; the limitation of the money supply so that there is not excess liquidity for big banks and funds to use to push up their paper wealth and to buy up housing stock and capital with; steady real interest rates; policies that discourage high individual debt; and policies that limit excessively high transport and merit good costs. These might encourage growth, increase productivity, and allow for a general rise in living standards and quality of life at the bottom almost regardless of inequality with regard to the top.

The question asks about evaluation; that means that those answering should consider how long a tax would take to be introduced, at what cost, how high the tax would be, whether it would be permanent or temporary, that they should consider alternatives, and that they should prioritise.

The ‘downsides’ of any wealth tax should therefore also be considered. Would such a tax simply go unpaid by rich individuals and corporations, and fall on those who have social care costs, education costs, or personal debt? Would it result in a lower amount of reinvestment in businesses, a lack of innovation or capital investment, and more unemployment? How important is inequality compared to growth, jobs, the government budget, or inflation as a government priority? Are there negative externalities to inequality, and are they greater than the opportunity cost of trying to reduce them for a government and society? To what extent is any gap a product of a long cycle of monetary or technological expansion which could resolve itself when the cycle hits the downside? Would a wealth tax have to be international to work, and how would it affect the capital or financial accounts of a country running current account deficits? What would happen to investor confidence?

No student will be expected to answer these questions, but they may be asked to ask them, to rank them, and to balance them with examples.