Why we should tax wealth instead of income

This is a moral foundation for the argument that wealth should be taxed and redistributed by the government, starting from the principle of maximizing personal liberty.

Life, liberty, and the pursuit of happiness

Assume we believe in maximizing personal liberty. That is, all other considerations aside, we as individuals should have ultimate freedom to make decisions about our lives. In this way, each of us is empowered to pursue our own happiness, according to our own beliefs.

We live together as individuals in a society, so our individual decisions have an effect on everyone else. Every liberty we take may provide us value, but may also impose a cost on others. When we make choices about how to exercise our freedoms, we should be prepared to bear the cost of those decisions. This is necessary, if we are to live in a fair and just society.

Property

As individuals, we may derive value from owning property. Ownership of property is generally an exclusive right, because the physical world is such that material things are unique. This means that our freedom to own a thing impinges on the freedom of everyone else to own it. Therefore, our ownership often represents a cost to others.

In order to own property, we must also be able to defend against intruders who may seek to violate our ownership. It can be said that the purpose of government throughout history has been to establish and protect property rights. There is a cost associated with maintaining a government capable of enforcing property rights.

The property tax

To possess things that are of value to us, we should pay the cost of protecting our right to have those things, as well as the cost of excluding others from owning those things. These costs are generally related to the value of the things themselves. Taxing property, or wealth, is the logical and moral way to protect our rights of ownership. If we stop paying for those rights, our ownership should cease to be recognized.

Levying an income tax to pay for the protection of property is immoral. The cost of protection is greatest for the wealthiest, yet the cost is not born by them. The poorer one is in relation to their income, the greater the injustice of the income tax. An individual with good income but little savings (e.g. a single parent living paycheck to paycheck), bears an unethical burden under an income tax.

The tax that is levied via the property tax should be used to pay the costs of law enforcement. It should also be used to compensate individuals for yielding exclusive ownership rights to others. A portion of the levied tax should be divided evenly and distributed back to individuals. This can be considered reasonable compensation for upholding a social contract. The implications of this form of wealth redistribution are profound.

Under an income tax system, we are incentivized as individuals to take as much as we can, without bearing the true cost of ownership. Under a wealth tax, we bear the cost of protecting everything we choose to own, therefore we are not incentivized to own more than we can afford to defend. Since wealth is redistributed every tax cycle, there is systemic pressure (however slight or great) pushing everyone back towards average wealth. Therefore, the long-term best option for those with above average wealth is to invest in raising the bar, rather than to hoard.

Other questions

There are many questions that need to be addressed. Here is a start at answering some of them, most require deeper discussion.

How much wealth redistribution are we talking?

The amount of taxation and how it is determined matters a great deal in practice, and might reasonably vary over time. The total amount raised must at least cover the cost of law enforcement, but the amount of compensation we should receive is not so straightforward to determine. There is also the question of if and how the tax rate itself should vary.

As property becomes more valuable, the marginal cost of protecting it appears to increase. Empirically, it seems that stealing a dollar from a rich person is easier to rationalize than stealing a dollar from a poor person. If it is easier for an individual to rationalize theft, the cost of preventing such theft naturally increases. This implies that a wealth tax should be progressive. That is, the rate of taxation should increase as total property value increases.

Daniel Altman presents a starting point for some practical aspects of a wealth tax in his New York Times Op-Ed.

Isn’t inflation already a wealth tax?

Sort of, it’s more like the evaporation of money. It’s a cost to holding money, not property. And it’s not a tax because it is not levied or used to pay for the total cost of property ownership.

What if we don’t or can’t afford to pay our taxes?

We can always afford to pay our taxes since they are only a small portion of our total wealth. It’s possible we have only illiquid assets on which we are taxed, but effectively cannot pay. Our share of compensation can certainly be withheld in order to pay our tax. In fact, we would normally only pay the difference between what we are owed and what we owe. If we fail to pay it is a breach of contract, and some or all of our property rights may cease to be recognized.

Isn’t this just racketeering?

Not really, the threat of theft actually exists, even if the tax isn’t levied.

If not at birth, at what age are individuals counted and taxed?

Perhaps 18 years of age is a good time to start being recognized as individuals, at least by default. In this way, we would not incentivize people to have kids in order to claim additional shares of compensation. This would also imply that we cannot own any property until we are at least 18. Children could possibly apply to become adults before that.

Are corporations people?

Corporations can own property and are thus taxed too, but do not have wealth redistributed to them. This is justified as there is a cost to protecting their property, but as they are not autonomous, there is no need to compensate them for upholding the social contract.

What about banks?

In order to implement the wealth tax effectively, we need to track property ownership, including that of money. Under such a system, banks are not needed to secure wealth, as it is simply a feature of the money itself. Banks can serve other purposes, but simply aggregating money becomes more expensive under a wealth tax.

Wait, we need to track all property?

Sort of, we only recognize property that is claimed and therefore tracked. This requires a much deeper discussion elsewhere.

What about debt?

Owning debt is an asset on which the creditor pays tax. Under the wealth tax it does not make much sense to use debt to enable consumption. Consumption is literally the destruction of value. It only makes sense to invest or lend money when the creditor believes value will be created.

How do we prevent people from hiding their wealth?

We don’t. But whatever wealth we “have” but don’t claim, may not be recognized and thus not protected.

Why would someone claim ownership of something if it introduces a cost to them?

If they don’t claim ownership, it’s not their property, and if it doesn’t belong to them, there’s nothing stopping someone else from owning it.

The pressure to claim comes from the fact that anything which is not claimed, may yet be claimed. To own things we must have a title which recognizes our ownership. There is a process for claiming anything that is not yet claimed. When we claim something as property, we are simultaneously gaining the right to control it, as well as agreeing to bear the cost of protecting it.

If you don’t claim your famous Picasso painting, it’s fine but:

1. you can only sell to anyone else not willing to claim (protect)
2. they can only pay you in something else which has not been claimed
3. the transaction probably needs to be kept secret, or else any observer can try to claim

How is the value of property assessed?

In general, by the amount people pay, or are willing to pay, to own it.

How do we account for sentimental value?

Sentimental value implies that something is worth a lot to us individually, and therefore we may not be willing to sell it even at a high price. In general, we should not be taxed on sentimental value. If we allow it, it is effectively a loophole in the property tax, and therefore must be handled very carefully.

How could we feasibly move from an income tax to a wealth tax?

Practical questions about valuation of property and how to implement a wealth tax deserve (and will have) a separate discussion.

What about education, healthcare, roads, and other so-called ‘critical infrastructure’?

There will always be controversy over which specific infrastructure should and should not be built by the government. The wealth tax goes a long way towards aligning everyone’s goals without elevating the role of particular technologies. When a government favors a particular infrastructure project, it becomes difficult to innovate past it. That means it can be hard to ever install something even better.

If infrastructure is to be built by a government, it should probably be paid for by consumption taxes, or some other method. These debates could perhaps happen at a more local level.

How do we quantify other costs, e.g. pollution?

Costs to society, like pollution, ought to be taxed and penalized. The costs and penalties should be determined by the communities they effect. Like infrastructure, these issues require ongoing discussion.

Next time, How we could implement a wealth tax