Why Wealth Taxes Sound Great—but Fail in Reality

Wealth taxes don’t work, but what about…?

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Why don’t wealth taxes work? Wealth inequality definitely is a growing problem in most of the Western world. Some suggest, many suggest: “Let’s tax the rich more.” It’s argued that many wealthy people have mastered the art of legally minimizing the income taxes they pay. So let’s, instead, tax their wealth, their assets.

But here’s the interesting part: Whether you’ll love this idea or you hate it, whether you lean far left or far right; whether you want to crush the rich or celebrate them doesn’t change the simple fact: Wealth taxes don’t work. They create more problems than they solve, and often lead to more lost tax revenue through avoidance in capital flight than gained revenue from the wealth tax itself.

Ask France. Can you imagine having to value everything every year? Not too burdensome for publicly-traded securities, but overwhelming when you talk about land, private equity, art businesses, farm, et cetera? So hard to do accurately. So inviting of abuse and of court battles. Plus, as mentioned, the capital flight would be crazy. Again, France. Or Sweden.

The government can try to introduce capital controls, but that’s a whole new can of worms. This flight of people in capital undermines the tax base and sends a chilling signal to entrepreneurs. Business formation slows down big time. Critics of wealth taxes always justifiably highlight the incredible administrative costs.

Armies of auditors, appraisers, and lawyers will be needed. My issue about all of that isn’t just the dollar cost. It’s that I’d rather these intelligent people were spending more of their time helping businesses to grow and compete internationally, not just sitting around counting and measuring. And cripe,

clever tax planners will still probably outmaneuver them. So Dave, you are a selfish, far-right, horrible person. No, I’m really not. In fact, I’d be very open to the idea of a graduated estate tax. Other countries have them, including the US. And we can learn from their mistakes and their approaches, evolution over the years.

Perhaps we exempt the first five or $10 million. Perhaps we have carve outs for family businesses and family farms because of liquidity issues. And we put in customized strict anti-avoidance rules. Hey, it’s a lot easier to measure wealth once than every year. Yes, really smart people will figure out some ways to limit taxes, but still this is something worth considering.

You know what always makes me laugh about this contentious subject? Many of the same people who argue for meritocracy argue against inheritance taxes. That’s a bit tough to square. By the way, I told my dad about this video, but assured him the government was unlikely to take away any of his 93 cardigan sweaters.

“Make sure of it. David, those are for you and the grandkids.” Oh my.