Thursday, September 19, 2019

Analysis: The Implicatons of a Wealth Tax in the U.S.

We know that taxation on capital income has a negative impact on the maximum amount of money individuals will have at the age of retirement and the amount of money they can re-invest into the economy because it's effectively a tax that reaches 100% in the infinite time horizon. That being said, this shouldn't be conflated with the idea that disparities in wealth and income don't matter. People who have a large amount of disposable income and accumulating large sums of wealth and potential wealth gives those people a disproportionate amount of extortionate political power. While it's not the most efficient, a wealth tax can be a good way of solving core issues in the United States even though I don't personally support it.  

Figure 1
Empirically, broad wealth inequality has a potentially negative effect on economic growth. Countries where gaps between income and wealth narrow have much greater overall economic growth than countries with widening income gaps. Despite this, the U.S. still has high real GDP growth than countries(Figure 1) with a lower Gini index, but still shows that the U.S. has the potential to be much greater than it currently is. The OECD finds that the large disparities in income can be associated with 10% reduced growth in Mexico and New Zealand, and up to 9% in the U.S. This is generally caused by the reduced educational outcome from the bottom 40% of earners, which we already knew. 

In his book, 'Capital in the Twenty-first Century', Piketty uses historical data to analyze the economic implications of inequality. Piketty finds that in times of high wealth inequality and slow growth, the return on capital investments will be lower than the rate of growth. This doesn't mean that r>g at all times, but this is definitely sometimes true and happens in all advanced economies at some point. It should be noted that although this is true, this doesn't necessarily mean all of Piketty's conclusions are true which is also implied by the fact that net share of capital income has been fairly stable and that the decrease in share of wealth from the bottom 90% can also be credited to student loans, mortgage refinance, consumer credit etc. Nonetheless, r>g being sometimes true is problematic because as capital returns shrink, investment firms and banks will start engaging in rent-seeking behaviours to try and maintain expected returns. This procedure inevitably fails since there is less wealth to extract from society.

First, democracy may be “captured” or “constrained”. In particular, even though democracy clearly changes the distribution of de jure power in society, policy outcomes and inequality depend not just on the de jure but also the de facto distribution of power. This is a point we had previously argued in “Persistence of Power, Elites and Institutions”. Elites who see their de jure power eroded by democratization may sufficiently increase their investments in de facto power, for example by controlling local law enforcement, mobilizing non-state armed actors, lobbying, or capturing the party system. This will then enable them to continue their control of the political process. If so, we would not see much impact of democratization on redistribution and inequality. Even if not thus captured, a democracy may be constrained by either other de jure institutions such as constitutions, conservative political parties, and judiciaries, or by de facto threats of coups, capital flight, or widespread tax evasion by the elite. - Why Nations Fail

 Warren's wealth tax, while not being the most efficient, is better than a lot of other tax alternatives. A large portion of wealthiest Americans inherited their money rather than investing it into a potentially robust economy. Whether you like Warren or not, a Wealth tax would do much good for the American public. Unlike it's better alternatives such as a land value tax, a cash-flow tax, or a progressive consumption tax, taxing direct wealth is actually known by the public and it has wide-spread support. The biggest hurdle would be it's constitutionlity, but seeing how a property tax is effectivetly a wealth tax, I don't see it being as big of a problem as people think.

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