If you are actually concerned about inequality

A number of pundits and politicians are suddenly advocating wealth taxes as a way of reducing inequality. But there is a much better way of doing so—progressive consumption taxes.

In the past, some have argued that progressive consumption taxes are fine in theory, but hard to administer. They might be easy to evade. But the same is true of wealth taxes.

We should not make the perfect the enemy of the good. For most people, a wage tax is essentially identical to a consumption tax, at least over their lifetime. Alternatively, most people could simply pay an income tax with unlimited 401k contribution and withdrawal privileges. That’s also effectively a consumption tax.

It is more difficult to deal with the self-employed, where the line between wage and capital income is blurry. In my view, all income from the firm where you work should be viewed as wage income. But investments should be fully expensed.

Most proposed wealth taxes only apply to the very wealthy, an implicit acknowledgment of their complexity. Each year, you’d have to value people’s stocks, bonds, art, businesses, houses, yachts, jets, stamp collections, Bitcoins, Ferraris, and many other assets. And does Taylor Swift’s human capital count? If not, why not? And if you are going to have a system that complex, where you need intrusive audits of each person’s wealth, then why would you want to tax wealth when consumption taxes are superior?

For instance, consider a wealth tax on a $100 million Hollywood mansion. That mansion also provides a flow of services that can easily addressed with a consumption tax. In contrast, a $100 million portfolio of Treasury bonds does not provide any consumption value, and thus the interest ought not be taxed.

Yes, there are grey areas with consumption taxes, but there are just as many grey areas with wealth taxes. So why advocate an inefficient wealth tax that favors current consumption over future consumption? That makes no sense.

PS.  Greg Mankiw points out that Warren’s proposal has a marriage penalty whereas Sanders’ proposal has a marriage bonus.



21 Responses to “If you are actually concerned about inequality”

  1. Gravatar of Scott Scott
    24. October 2019 at 09:57

    Or completely eliminate the SALT deduction.

  2. Gravatar of Derrick Derrick
    24. October 2019 at 10:38

    I’m on board with this Scott. Tax on a 1998 used Corolla? 2%. Tax on a $180,000 new Maserati? 25%. Or whatever. The idea should be that as the price of a good goes up, so does the tax rate. This could have a bunch of positive externalities, like having people buy quality, well made products instead of expensive branded products that wear out after one year. It would make the market more efficient, as the lower cost items would sell more than higher cost products, which would force luxury items to compete on something other than price signaling.

    I like state’s rights though, and it would be interesting to see how this would play out at a state and local level.

  3. Gravatar of Bob Bob
    24. October 2019 at 10:51

    The point of the wealth tax is to mobilize that idle capital and use it to finance public health, education, and infrastructure.

    The consumption tax will run into the exact same problem that you highlight. You say that the tax on a $100 million mansion will capture the true value, but that’s not true if the buyer and seller list it for $1, instead offering the money as a 0% loan or bartering some fancy cars. Just like the DMV has to track down and value a gifted vehicle for tax purposes, you’d need the same thing to value all of the valuable items that rich people are buying and selling for $1. Your consumption tax hasn’t really solved any problem.

    Further, you run into the inherent problem that Warren’s plan is trying to solve. The wealthiest spend a vanishingly small portion of their wealth, since even fancy foods and houses only add up to so much money. Instead much of it sits idle in reserve (companies spent $800 billion on unproductive stock buybacks last year https://www.apnews.com/438fae12f9204b1fbd8e8b1985ae554f). The point of the wealth tax is to mobilize that idle capital and use it to finance public health, education, and infrastructure.

  4. Gravatar of John Hall John Hall
    24. October 2019 at 11:00

    I would adjust this:

    “Alternatively, most people could simply pay an income tax with unlimited 401k contribution and withdrawal privileges.”

    to also mention Roth IRAs, which allow more investment options and are not tied to your employer.

    One thing I like about this approach is if people with a lot of wealth in taxable accounts to take advantage of it, they must first sell their assets and pay taxes. This would contrast with just lowering the marginal tax rates on capital gains or dividends, which might disproportionately benefit people who already have a lot of wealth.

    You could also move slowly and increase the limits on roth IRAs and 401ks over time to the point that 99% of people have all of their money in those types of accounts.

  5. Gravatar of rayward rayward
    24. October 2019 at 11:03

    Sumner’s Austrian friends at Mercatus (they are Sumner’s friends, aren’t they?) have the most efficient wealth tax: in a financial crisis, let asset prices collapse. Taxing wealth a couple percent a year is small bore and won’t reduce wealth inequality. Let markets reduce wealth inequality. A financial crisis happens because markets are screaming for correction. Why do believers in markets only believe in markets when it’s fair weather. To love markets is to have faith in markets even when it hurts. Markets aren’t just for hypocrites.

  6. Gravatar of ssumner ssumner
    24. October 2019 at 11:10

    Scott, I agree.

    Bob, You said:

    “mobilize that idle capital”

    I have no idea what that even means.

    You said:

    “You say that the tax on a $100 million mansion will capture the true value, but that’s not true if the buyer and seller list it for $1, instead offering the money as a 0% loan or bartering some fancy cars.”

    That’s not how property taxes work; they are based on fair market value.

    “companies spent $800 billion on unproductive stock buybacks”

    Why are stock buybacks “unproductive”?

    John, Good point.

    Rayward, I have no idea who you are talking about. Do you have a link?

  7. Gravatar of Bob Bob
    24. October 2019 at 11:27

    “That’s not how property taxes work; they are based on fair market value.” Isn’t that the very issue that you highlighted as a major problem with the wealth tax, the problem of valuation?

    I call buybacks unproductive, because the firm has decided that it is better to pay its shareholders that money rather than invest in labor or capital improvements. I’m sure the managers and shareholders are very happy with that self-dealing arrangement, but from an economic perspective it is a non-productive use of the firm’s resources.

  8. Gravatar of BB BB
    24. October 2019 at 13:41

    Buybacks actually free up “idle capital” if there is such a thing. If a company doesn’t have any good ideas to invest in, a buy back makes perfect sense.
    I like this post. I think that wealth inequality is a major issue in this country now, but I agree that wealth taxes are problematic. And it’s been tested. Solutions that work are better than solutions that don’t work.

  9. Gravatar of ssumner ssumner
    24. October 2019 at 14:06

    Bob, Your definition of “nonproductive” makes no sense. You are confusing money with real economic resources. Paying dividends does not use up real economic resources. That’s a basic error to assume it does.

    Capital is nonproductive when real capital sits idle. Money has nothing to do with it.

    Yes, the valuation problem applies to both taxes, which is what I said in the post (“the same applies to both”).

  10. Gravatar of Michael Sandifer Michael Sandifer
    24. October 2019 at 14:09

    Whether stock buybacks are productive depends entirely on the circumstances. Government should get out of the business of regulating securities, for the most part.

  11. Gravatar of Benjamin Cole Benjamin Cole
    24. October 2019 at 16:04

    I think a growing problem with both income and wealth taxes is their uncollectability.

    Income and wealth taxes have become a domestic and international shell game Gong Show.

    The nice thing about property taxes may not be that they are fair or unfair but they are collected.

    My guess is that import tariffs also have the same virtue of being collectible. In large part fuel taxes have the same virtu.

    It is true that a national sales tax can be avoided by those people in cash transactions, but then most sales can probably be taxed when you consider a Walmart are most retail districts.

    I never liked payroll taxes, which in the US are paid half by the employer. Payroll taxes strike me as a tax on productive behavior.

  12. Gravatar of dtoh dtoh
    24. October 2019 at 17:49


    Here again is my excellent proposal which I have explained many times before on your blog.

    1. No income, corporate, inheritance or capital taxes whatsoever.

    2. Keep social security

    3. National (i.e. to fund the federal government) sales tax of 20% for any purchases (including food, rent, medical care and education) for non-business purposes.

    4. Everybody gets a “credit” card good for an annual exemption on $5k of purchases. ($20k exemption for a family of four)

    5. After the exemption is used up or if the card is not used for purchases, then the sales tax applies.

    6. Cards can be cashed in for the remaining value of tax exemption at anytime.

    7. Businesses exempt themselves from the sales tax by providing their EIN number at the time of purchase. (Just like now fraud ends you in jail.)

    8. Government contracts (e.g.with Visa, Amex, etc.) to administer the cards and sales tax.

    9. Any asset purchase for personal use over $50k is exempted.

    10. States and municipalities fund themselves with a fixed assets tax on any assets that were exempted from the national sales tax (hopefully very progressive on big houses, private jets, and expensive cars.)

    11. Business assets are exempted. Any asset used for both business and personal use is subject to the tax.

    Also as I have explained many, many, many times here.

    The numbers work.

    Tax evasion is manageable (while still avoiding the complexity and bureaucracy of a VAT system.)

    90% of accountants and lawyers lose their jobs.

    The IRS’s role is limited to enforcement

    The state/local fixed assets tax is easily built on the existing property tax collection infrastructure with very little additional cost or work

    Business compliance costs drop dramatically.

    Inequality decrease dramatically.

    Progressive trustafarians (trust fund babies) will hate it.

  13. Gravatar of MJ MJ
    24. October 2019 at 19:05

    Seems to me that a wealth tax would be way easier to implement and harder to evade than a consumption tax even though it does favor current over future consumption. People could simply self report their wealth and the govt can choose to buy those assets at their self reported value if they are obviously way under valued; (Taylor Swift’s human capital would probably not be taxed because it can’t be auctioned in a marketplace, but that is a rare form of wealth and is meritocratic anyways).

  14. Gravatar of P Burgos P Burgos
    24. October 2019 at 21:25

    If most capital is now “human capital” does this have any impact upon how a progressive consumption tax would work? My intuition is that the manner in which hedonics work for human beings would mean that a lot more people would try to do the whole Mr. Money Mustache thing and retire between age 30 and 40. That is, a progressive consumption tax would allow the thrifty to avoid more taxes than they already do, and the thrifty also tend to have higher levels of human capital, having a higher propensity to plan for the future and follow through.

  15. Gravatar of Michael Sandifer Michael Sandifer
    25. October 2019 at 01:22

    I’m with Mankiw. Give me a progressive VAT and a negative income tax.

  16. Gravatar of Bob Bob
    25. October 2019 at 04:41

    “Paying dividends does not use up real economic resources. That’s a basic error to assume it does.”

    I think that would come as quite a shock to any CEO in the country.

  17. Gravatar of mbka mbka
    25. October 2019 at 06:04


    real economic resources are resources that can actually do something – like capital equipment. Money in and by itself can’t do anything. It’s a medium of exchange, a store of value, a unit of accounting. Not a tractor that helps producing food. Similarly, a share buyback happens when a company can’t figure out what to productively do with money it has accumulated. Same with dividends. By buying back the shares, or paying dividends, it returns capital to shareholders, and the wider economy. The result is not a waste: the result is that the same money will now, hopefully, be used more productively elsewhere than the company would have been able to. Counter-example Apple: it is sitting on cash instead of buying back shares or investing the money. Then again even here as long as it’s in the bank, it will be loaned out etc. You have a really simplistic view of how the economy works. The basic idea is this: there’s nothing to be gained simply by investing the money into something random for the sake of investing it. You have to invest it into something productive.

  18. Gravatar of cyborg_nomade cyborg_nomade
    25. October 2019 at 10:48

    wouldn’t a single flat land tax based on self-declared value be a way better solution?

  19. Gravatar of Njnnja Njnnja
    25. October 2019 at 10:50

    Isn’t another alternative more inflation? 2% inflation plus a 2% wealth tax does the same thing to wealth as 4% inflation.

    At the extreme case such as Venezuela, inflation makes all your money worthless. They could have done the same thing with a 99% wealth tax, but inflation is easier to do since you don’t have to find the money, you just need to stop it from being converted.

    Coming back to reality, if the fed can hold to 2% inflation they should be able to hold 4% inflation. And the extra nominal dollars can get redistributed just like wealth tax proceeds.

  20. Gravatar of LK LK
    25. October 2019 at 12:28

    Perhaps the Democrats would have better luck implementing the Trump wealth tax:


    “Trump […] is proposing a one-time “net worth tax” on individuals and trusts worth $10 million or more.

    By Trump’s calculations, his proposed 14.25 percent levy on such net worth would […] wipe out the debt in one full swoop.

    “The plan I am proposing today does not involve smoke and mirrors, phony numbers, financial gimmicks, or the usual economic chicanery you usually find in Disneyland-on-the-Potomac,” Trump said.

    Trump would exempt the value of an individual’s principal home from the net worth total.

    “By my calculations, 1 percent of Americans, who control 90 percent of the wealth in this country, would be affected by my plan,” Trump said.

    “The other 99 percent of the people would get deep reductions in their federal income taxes,” he said.

    Eliminating the national debt would save the federal government $200 billion a year in interest payments, Trump said. He proposes to earmark half the savings for middle class tax cuts, and the other half for Social Security.

  21. Gravatar of Georg Georg
    25. October 2019 at 20:20

    I’m glad Mankiw brought up Yang’s progressive consumption tax in a favourable way compared to Warren’s wealth tax proposal, both in a NYT column and in a speech at an inequality conference. It’s nice to see economists publicly pointing out when one candidate might have a more economically defensible plan than the others.

    It’s a shame that economists are not often listened to by the voting public or by politicians. My impression is that they do not have very much sway as a profession over the matters that they have expertise in. I’ve wondered if perception of diversity in opinion is to blame, but even where there is a fair amount of consensus there is often little heed paid.

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