A wealth tax for shared growth

Current tax systems have made it possible to mitigate income inequality. However, wealth inequality persists and maintains an increasing trend.

Modern societies increasingly suffer from a serious problem of inequality. Not only income, but mainly wealth inequality. Indeed, an Oxfam study says that the richest 1% of the population holds as much wealth as the other 99%. Even during the pandemic crisis in which we live, the rich are getting richer, while the poorest are the most affected.

Current tax systems have made it possible to mitigate income inequality. However, wealth inequality persists and maintains an increasing trend. Taxes mainly focus on taxing money when changing hands. This occurs both when economic agents spend and consume (via indirect taxes, which do not solve the inequality problem) or when they earn income (via direct taxes).

The problem is that the accumulated wealth is left out. Two individuals may even receive the same annual salary, but still have a very different level of accumulated wealth. This can occur via the receipt of inheritances or capital gains (as a general rule, subject to a single fee, instead of being progressive). How, then, can we resolve wealth inequality? For those who consider that this inequality is not acceptable, a possible answer is to tax it.

French economist Thomas Piketty, in his book “Capital in the XNUMXst Century”, argues that millionaires' wealth must be taxed. Its proposal consists of a progressive tax on wealth ranging from 5%, for values ​​above two million euros, up to 90% if above 2.000 million euros. Piketty argues that this will help reduce the gap between rich and poor and also to finance the payment of the public debt of the states.

Outside the academic world, in the political world, the idea also gained momentum. Democratic primary candidate for the 2020 US presidential election, Elizabeth Warren, echoed this proposal, although in a more moderate way. Warren advocates an annual tax of 2% on wealth above $ 50 million and 3% above $ 1.000 million.

This tax, therefore, consists of taxing the stock of wealth of individuals that exceeds the determined levels, instead of income flows, such as wages or capital gains. Wealth includes everything from movable and immovable property, holdings in companies, financial products, cash, among others, deducted from the respective unpaid debts. The measurement process can be complex, both due to the volatility of prices in the financial markets, as well as the incentives to hide wealth, namely through foundations that only serve personal interests. A robust legislative framework would be needed to avoid ambiguities and loopholes.

Some criticisms made of this proposal refer to the fact that taxing legitimately earned wealth, which has already been taxed as a result of income, as a result of individual effort. In addition to this double taxation argument - not always valid, taking into account the specifics of tax regimes and the opportunities for evasion - some argue that such a tax will lead to discouragement from individuals seeking to undertake and achieve the social mobility necessary to reach the level millionaires. Ultimately, growth and economic development could be jeopardized.

However, the first question can be answered with a normative argument, saying that those who have more should, because they can effectively do so, contribute more to society. In fact, your contribution, if properly applied by the State, will be essential for others to get out of poverty. This tax would allow the collection of relevant revenue for the State and, thus, help to reduce the gap between rich and poor, by financing social assistance programs or by increasing spending on education or housing, enhancing equal opportunities and social mobility.

In addition, the distortions caused by a wealth tax will be much less than those caused by taxes on income from labor or capital. What is being taxed is often non-productive wealth, rather than penalizing the value generated. Whoever has wealth that is not generating value or contributing to society, will have incentives to apply it in something that brings added value that offsets the tax to be paid, thus enhancing economic growth. The revenue generated could even be used to ease the tax burden on the income of the middle class or companies.

There is, however, an extremely important final issue related to the operation of such a tax. If Portugal applied such a proposal what would prevent millionaires from fleeing with all their wealth to another country? Taking into account the mobility of capital in the global world in which we live, it would be an unthinkable proposal to apply unilaterally in the national context, which would imply some coordination on an international scale.

However, today more than ever, inequality must be at the center of economists' concerns. It is not only about growing if that wealth is not available to everyone - we need real shared growth.

 

The exposed article results from the partnership between Jornal Económico and Nova Economics Club, the group of students of Economics of the Nova School of Business and Economics.

 

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