This changing political climate is a trend that capital owners will resist in vain. Instead they should push for the form of taxation that is best for both them and for capitalism itself. A progressive net wealth tax is an annual levy on taxpayers' net worth — their total assets less their debts — paid at a rising rate above a tax-free amount.
Only a handful of countries have them, but they include some of the world's most successful economies such as Switzerland and Norway. In the US, a wealth tax has been proposed by Elizabeth Warren and Bernie Sanders, the two most leftwing candidates in the last presidential election. So far the Biden administration's willingness to raise taxes reveals no appetite for considering such a tax. Successful capitalists should hope for that to change.
All countries already tax wealth holdings. They just rarely tax them on a regular recurrent basis. Instead they impose levies on assets when they are exchanged from one form to another, as with capital gains tax on realisation and stamp duty on transactions, or when they are transferred from one person to another, as with inheritance and gift taxes. In addition, all countries levy recurrent taxes on wealth in the form of real estate.
All of these make capitalism work less well. Taxing wealth only during transactions rewards hoarding rather than the deployment or reallocation of capital to whatever capitalists may think is the most productive use. It also discourages passing on wealth to young generations at the time they can make best use of it.
The incentives created by existing wealth taxes are not just inefficient. Some of them are outright perverse. Inheritance and gift taxes in effect impose a lighter burden on the assets of those who live longer or hoard their wealth more than on those who die sooner or pass it on faster. Property taxes are levied on gross capital wealth, so someone with a 90 per cent mortgage pays the same as someone who owns the same property outright and is ten times richer.
Capital gains tax penalises those who make the best investment choices by taxing only the incremental growth in wealth and making losses deductible. It also ignores that the ability to pay tax depends on one's total holding rather than the amount by which it goes up. Simply put, such a regime redistributes from millionaires who invest well to billionaires who invest badly. A net wealth tax would do the opposite.
A net wealth tax also compares favourably with taxes on income flows from capital — corporate profits, dividend and interest income. They have in common that the greater your profit from investing a given amount of capital, the more you pay in tax. Again, if you invest a billion badly, you may be taxed less than if you invest a million very well.
With a net wealth tax, the tax burden is independent of the return. It follows that the most successful investors would keep more of their return and see their capital accumulate faster. It is the tax version of the New Testament's parable of the talents.
Over time, this would place more of the economy's capital in the hands of those who allocate it well. The model rewards success and strengthens capitalism's potential for creative destruction. A wealth tax that is also progressive would, in the course of time, support the growth of less concentrated wealth — more modest but more frequent well-invested fortunes.
The upshot is that, among all the ways to tax capital, a progressive net wealth tax is the regime friendliest to capitalism as well as the most supportive of a property-owning democracy. And that, surely, is the social model that best suits capitalists in the long run — even those ultra-rich but bad investors whom the wealth tax would hit hardest.
- Financial Times
