A Taxing Title

by Don Boudreaux on July 26, 2016

in Taxes

Warren Smith sent to me a link to a short essay by Noah Smith entitled “A Wealth Tax Looks Like It Can Make a Country Richer.”  But the title is misleading.  If the substance of the essay is correct – and that substance is quite plausible – what ‘makes a country richer’ is not a wealth tax but the elimination (or reduction) of taxes on capital gains.

Noah Smith reports on research from 2013 by Daphne Chen, Fatih Guvenen, Gueorgui Kambourov, and Burhanettin Kuruscu.  These researchers find that under plausible real-world circumstances, if government replaces taxes on capital gains with taxes on wealth, the economy becomes more efficient than it would be under a continuation of a regime in which taxes continue to fall heavily on capital gains.

No doubt.  But, again, what make the country richer here is not the wealth tax per se; rather, what makes the country richer is the elimination or reduction of taxes on the wealth-producing activity of investing.  Or to criticize the title (“Efficiency Gains from Wealth Taxation”) of the paper on which Noah Smith reports, the source of the efficiency gains is the elimination or reduction of taxes on capital gains; it’s not the wealth tax per se.

Even the most uncompromising and vigorous opponent of taxation understands that some taxes are less economically harmful than are other taxes, and that – given the reality that governments will tax – it is helpful to distinguish less-harmful methods of taxation from more-harmful ones.  I’ve not read the 2013 paper linked to above.  Yet judging from Noah Smith’s summary of it, from its abstract, and from what I know of economics, its thesis is sensible: taxing wealth might – only might – be less economically destructive than is taxing the gains from successful investing and, therefore, revenue-neutral increases in taxes on wealth and decreases in taxes on capital gains might indeed result in less wealth destruction over time.

For the record, I do not here endorse a tax on wealth (although I do endorse the elimination of taxes on capital gains).


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