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Why isn't there a tax system based on net worth (instead of income), aka a wealth tax?

Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 Gautham asked almost 3 years ago

Why isn't there a tax system based on net worth (instead of income), aka a wealth tax?

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Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 Chirag answered over 2 years ago

This has been tried (sort of) in various places. The most famous is the North-American style Property Tax, that led, in 1978, to Californians voting on Proposition 13. Income and expenditure are (relatively) easy to tax, because you can tax them at the point of transaction. When money is already changing hands, it's easy to divert some of that money into the pockets of the government. In the case of income, most people still have jobs - taking the tax out of their pay packets is easy for governments, firstly because it's happening in cash, and secondly because it moves the burden of processing onto employers away from government departments. In the case of sales taxes, whether VAT / GST / Sales tax, or stamp duty in shares or property transaction taxes, likewise, you have the combination of money changing hands in cash one way, as the goods move the other. And, in most cases, a business is involved, so you can make them responsible for the implementation. With wealth tax, you run into two distinct undisputed problems - valuation and liquidity. I say undisputed in that economists seem to agree that they are 'hard problems', not that different solutions haven't been proposed. **The Valuation Problem** You own a car. That's part of your wealth, and therefore part of your tax calculation. What is it worth? Go on - value it now, and write down your answer... for your car (or your parents car if you don't have one, and they do.) What's my car worth? My 1997 Jaguar? Well, looking on a local car sales website, the answer might be as low as £1,000 or as high as £4,000 for one of similar age and mileage. Of course, those are advertised prices, and the guy listing at £4,000 may be not serious, or willing to haggle... but until you try to buy, you don't know. Now apply this to, say, a Picasso last sold in 1970. What's it worth? You trust a tax officer to make that judgement? **The Liquidity Problem** My parents are retired. They own a house they spent 30 years working to afford. House prices in London have gone up a lot since 1972 when they bought it. A wealth tax basically hits middle-class retired people, hard. Because they have assets bought a while ago that have gone up in value, but don't have enough money to hide things in tax-reducing schemes, they have 'wealth' but... Tax them... how will they pay? You want to make them sell that house? Or would you rather they didn't eat? Perhaps you'd rather they didn't spend on fuel this winter. If you live in London, pensioner death due to rising energy prices is a serious concern. Cynically, middle-class retired people are swing voters that no political party wants to alienate. More generously to politicians, middle-class retired people don't deserve to have their houses taken away when they hit 80. **The third problem - the disputed one** **What actually hurts the ecomony least?** There is an argument, supported by many economists, that actually, the thing you can do to hurt the economy least is set capital gains taxes to zero and only tax consumption and/or income. This leads to long-term growth. Of course, it leads to long-term growth at the expense of short-to-medium term making things even worse for the poorer people in society. (Not the poorest, homeless people are pretty much outside of the tax system anyway.) But those on welfare and low-paid jobs get kicked even more. Wealth Taxes are fiercely debated, because 'the rich get richer and the poor stay poor' isn't actually true in most Western Countries. The truth over most of the 20th Century was closer to 'the rich get richer and the poor get richer too, but not as fast over the long run.' (Though, as Rupert Baines points out in the comments, there's debate about whether that's been true since 1970.)

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