With wealth inequality growing even more than income inequality, everybody from Thomas Piketty to Elizabeth Warren knows we need some sort of routine way to drain the most bloated fortunes. Otherwise we’re faced with not just growing inequality in living standards but increasingly outrageous inequality in political power.
One obvious partial remedy- a wealth tax- has numerous problems. The most severe is that the Supreme Court (as constituted for the foreseeable future) would declare any wealth tax unconstitutional, because it’s not specifically provided for in the Constitution. (The income tax required its own constitutional amendment.) I think that a modest tax hitting accumulated wealth could nevertheless be implemented without raising any constitutional issues.
One ingredient would be very simple. The special low rates for capital gains should be eliminated. At a typical inflation rate of 1.5%/yr to 2.0%/yr and a top tax rate of ~40%, that would usually amount to ~0.7%/yr even on wealth that was not growing, just keeping up with that small inflation. There would obviously be enormous resistance to this step from the rich. I think one aspect of that resistance might be justifiable, in that there would be big increase in the uncontrolled and unpredictable tax whose rate depends on the inflationary rate, not just on real income or even real wealth. I’m no economist, but it seems weird and probably a source of perverse incentives to have a big tax like that, especially given the many ways that rich people have of hiding things. Nevertheless, including capital gains as regular income isn’t even a new policy, much less a constitutionally shaky one.
So here’s the new idea. Couple the elimination of the capital gains category with a deduction for purely inflationary increase in nominal wealth. Of course that requires having a number for someone’s wealth. How to get it? Simple- let people voluntarily register whatever wealth they choose for a modest fee, say 0.5%/yr. For very rich people in high brackets, that could be a big saving and also provide some insurance against arbitrary inflation-based taxes. But it would also bring in a lot of revenue from the richest people. I’m guessing somewhere in the neighborhood of $250B/yr.
People in low brackets wouldn’t have to pay any attention to this, even if somehow they had some small capital gains. Tax forms would be simpler, since all income would just be income, without all sorts of sub-categories of capital gains. Only high-bracket people would have an incentive to go through the paperwork. Major understatement of wealth, a big problem with actual wealth taxes, wouldn’t pay because it would mean paying more income tax on capital gains. Hiding capital gains would remain a problem, but not a new one.
Maybe it would be better just to eliminate the capital gains category and let the rich worry about inflation. I suspect, however, that would increase the already intense pressure for austerity they exert on the government, at least when he Democrats are in office, which could make big problems for working people. Those of you who understand this sort of thing better might want to weigh in to explain how this idea would or wouldn’t work.