Turning Virtue Into Vice: Wealth Taxes Are the New Sin Taxes

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Turning Virtue Into Vice: Wealth Taxes Are the New Sin Taxes
AP Photo/Charles Krupa
Turning Virtue Into Vice: Wealth Taxes Are the New Sin Taxes
AP Photo/Charles Krupa
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Among a growing segment of the political left, wealth is now considered a sin -- a socially undesirable behavior, like drinking or smoking, to be discouraged or eliminated through targeted taxes.

Throughout history, governments have used targeted taxes to discourage undesirable behavior. Alcohol and tobacco taxes are the most well-known sin taxes, but sugary drinks and fatty foods are the most recent target in an effort to reduce obesity. Most of us would agree that having a beer, a smoke, or a soda impacts only the person who consumes the product, but proponents say these taxes are justified in order to reduce the kind of excessive behavior that imposes costs on society, such as higher public spending on health care.  

As a general rule, economists believe that taxes should be neutral to individual or business decision-making — meaning that taxes shouldn’t determine whether you purchase an electric car or an eight-cylinder gas guzzler. However, some economists argue that it is acceptable to use tax policy to change behavior when that behavior is causing externalities — that is, harm to others.

These levies are called Pigouvian taxes after the English economist Arthur Pigou, who spent his career studying how taxes could be used to prevent externalities. The much debated carbon tax is another notable example, one intended to reduce harmful carbon emissions by raising the cost of them.

In a similar way, presidential candidates Bernie Sanders and Elizabeth Warren hope to reduce the amount of wealth in America by raising the cost of it. Both have proposed targeted taxes to combat the perceived “problem” of excessive wealth and inequality.

Warren’s wealth tax is the more modest of the two. Her plan would levy a 2% tax on every dollar of net worth above $50 million, which would rise to 3% for wealth above $1 billion. Sanders’ plan is even more progressive. It starts with a 1% levy on net worth above $32 million and rises incrementally to 8% for net worth above $10 billion.   

Sanders has gone as far as to declare there should be no more billionaires. (My Microsoft Surface just shuddered as I wrote that.) 

The traditional way in which people become wealthy is through saving and investing, and these activities are also in the crosshairs. Sen. Cory Booker would tax the capital gains income of the wealthy at the same top rate as wage income. Sen. Ron Wyden, the ranking Democrat on the Finance Committee, is developing a plan to tax capital gains on an annual basis rather than when realized, a so-called mark-to-market method of taxation. These lawmakers tend to consider investment income “unearned,” like gambling winnings, as opposed to “earned” income such as wages and salaries.

Once upon a time, saving and investing were considered virtues that we taught our children to live by. The piggy bank symbolized these virtues because it taught thrift and delayed gratification. The passbook savings account taught kids how savings could grow by earning interest. The lemonade stand taught them entrepreneurship and salesmanship. The summer job taught the virtues of arriving on time and putting in a good day’s work. “Work hard and one day you’ll own the place,” we were taught.

But to many progressives, these uniquely American values now are considered to be a vice that must be stamped out through wealth taxes and the like.

It does seem strange that tax policies Europeans have largely abandoned are gaining favor in the U.S. Since 1996, the number of European nations levying a wealth tax has dropped from 14 to four. In Spain, the once temporary wealth tax has been extended but each of the 19 regions can set its own threshold. Spain’s largest region, Madrid, provides 100% relief from the wealth tax and has become a magnet for wealthy people from around the country.     

Because personal income tax rates in most European countries are well above the top 37% rate in the U.S., many Americans are under the belief that our rich are under-taxed relative to their counterparts in Europe. We should be careful about confusing tax rates and actual tax burdens.

According to a study by the Organisation for Economic Co-Operation and Development, the U.S. has the most progressive income tax system of any developed nation if we compare who pays how much of the total tax take (this measure includes income and Social Security taxes). The rich in America pay a larger share of the income tax burden than do their counterparts in any other country and our poor pay a smaller share of the burden than do the poor in other countries — some 49 million taxpayers (32% of all filers) pay no income taxes, and many of these nonpayers receive generous checks back through refundable tax credits.

The latest IRS data, for 2017, shows that the top 1% of taxpayers earned 21% of the nation’s income, but paid roughly 38.5% of all income taxes. That’s a larger share than was paid by the bottom 90% combined, even though the larger group earned more than half of the nation’s income. The top 0.001% of taxpayers (just 1,433 people) paid 3.86% of all income taxes, more than the amount paid by the bottom 50% (71 million) of taxpayers combined.

What supporters of the wealth tax tend to ignore is that it suffers from the same contradictory goals as all sin taxes: If the tax successfully stops or reduces the offending behavior, then it won’t raise enough revenues to fund dedicated spending programs. In other words, if there are no more geese, there are no more golden eggs.

Scott A. Hodge is president of the Tax Foundation, a nonpartisan tax research group in Washington, D.C.



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