The insightful responses in this forum bear witness of the rich debate now taking place about wealth taxation in the United States. In this brief response we cannot do justice to the detailed arguments in each piece, but will rather aim at putting the debate in a broader historical and international perspective.
Many European countries have had progressive wealth taxes over the course of the twentieth century (among them are Germany, France, Denmark, Sweden, Austria, Finland, and Luxembourg). Some still do (Norway, Spain, Switzerland). The European experience with wealth taxation shows that a wealth tax is destined neither to succeed or to fail; it all depends on how it’s implemented in practice and whether there’s the political will to make the tax work.
The main reason why a number of European countries abolished their wealth tax is that they gave up on attempting to address international tax competition. There’s no EU-wide wealth tax, and EU member states don’t tax expatriates. A wealthy Swedish resident could avoid the Swedish wealth tax by relocating to Switzerland—it was child’s play.
The international mobility of wealthy individuals would not be a concern for a U.S. wealth tax, because U.S. citizens are taxable in the United States no matter where they live. Karl Smith and Dean Baker worry that wealthy Americans would renounce citizenship should a wealth tax be implemented. But this risk can be avoided. A steep exit tax could be applied at the time of citizenship renunciation; the Warren wealth tax, for example, includes a 40 percent exit tax on net wealth. Other mechanisms could be considered. For instance, the United States could continue taxing billionaires even after they renounce U.S. citizenship. To a large extent, all large fortunes are social creations: U.S. billionaires have benefitted from U.S. markets, U.S. workers, the U.S. legal system, U.S. public infrastructure, and so on. It would be legitimate for the United States to keep taxing billionaires who built their wealth while living in the United States, even after they’ve renounced U.S. citizenship.
In the twentieth century, the United States pioneered the sharply progressive, quasi-confiscatory taxation of high incomes. From 1930 to 1980, the top marginal income tax rate averaged 78 percent; it exceeded 90 percent in the 1950s and early 1960s. The goal of this policy was not to generate government revenues. It was to reduce the concentration of pre-tax income. It was to change how markets work: to discourage the various forms of rent extraction that are associated with unfettered markets and to suppress the incentives for corporate executives, for instance, to pay themselves sky-high salaries.
Dean Baker worries that a wealth tax would not change the way that markets work—that it would not affect the distribution of market income.
In fact, we view the wealth tax as a way to reconnect with and modernize the U.S. tradition of using the tax system to regulate markets and reduce pre-tax inequality. Wealth is power: the power to influence markets, government policies, the political process, the prevailing ideology. Reducing wealth inequality would reduce the concentration of power. It would contribute to equalizing economic and political power, which would contribute to more equal market outcomes. A wealth tax, if progressive enough, would be much more than yet another tax-and-spend policy.
From that perspective, we fully agree with the insightful responses by Bryce Covert, Martin O’Neill, Stuart White, and Felicia Wong, who all stress the need to go beyond ex post redistribution and stress how the wealth tax could contribute to that goal.
Of course, a wealth tax is not enough. It would not, by itself, address the rise of inequality. Many other policies—such as patent regulation, worker representation on company boards, a more equal access to higher education, and campaign finance reform, among others—have a critical role to play to equalize market outcomes. The wealth tax is not a silver bullet; it is only part of the policy response. But we believe it is an important part, because it targets the stock of wealth directly—and is thus the powerful fiscal tool that governments have at their disposal.