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The Wealth Tax: Could It Fix Our Current Economy?

Gabrielle Karol
Gabrielle Karol
Posted on Dec 21, 2012

The fiscal cliff is fast approaching, and with tax cuts for affluent Americans set to expire, many of our nation’s richest citizens could face a significant tax hike.

From the perspective of President Obama and many Democrats, the way to decrease our deficit is to significantly increase the tax rate for high earners, so many of their proposed solutions call for tax changes based on income.

But are they focusing on the wrong thing? Is income really the best basis for deciding on tax hikes?

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Recently, some economists have come forward to suggest that the key to fixing our country’s long-term economic woes is to start taxing wealth, not income. In the United States, the distribution of overall wealth–this includes an individual’s investments, savings and other assets–is highly imbalanced: The top 1% of Americans possess nearly 50% of total wealth in our country.

But are economists unfairly targeting the rich? Probably not. It turns out that wealth inequality adversely affects economic growth, and harms our country’s chances for success, according to research conducted by the International Monetary Fund, which focuses on securing financial stability around the globe.

We’ll take a closer look at how wealth inequality can hurt us all economically, and how our nation would change if we focused more on solving the inequality gap.

The Real State of Wealth Inequality in the U.S.

Simply put, wealth inequality is exactly what it sounds like: an unequal distribution of assets among a group of people. Even in a country in which the recent election was dominated by the concept of the 99% vs. the 1%, few Americans really understand the scope of wealth inequality in the U.S.

RELATED: How Much the Fiscal Cliff Could Change Your Taxes

A recent survey conducted by Michael I. Norton and Dan Ariely—professors at Harvard Business School and Duke University, respectively—showed that most Americans greatly underestimate the state of inequality in the United States. The majority of respondents estimated that the wealthiest 20% of Americans owned only 59% of total wealth in this country.

The reality is starker: Recent data has shown that the top quintile owns as much as 84% of total wealth. In the below graph, taken from Norton and Ariely’s paper, you can see just how little wealth is owned by the four lower quintiles.

When asked how they’d want wealth distribution to look in an ideal scenario, the majority of respondents recommended that the top 20% own only 32%–that’s much closer to the distribution of wealth seen in Sweden.

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  • Beccaod

    Nope, I still am all for the Fair Tax, which could be a tax on the wealthy if they are spending lots of money. 

    • http://www.facebook.com/profile.php?id=1063140187 Alex Shepard

      The problem with the “Fair Tax” is that consumption increases economic growth.  We wouldn’t want to encourage too high of a savings rate.  In fact, some countries, like Japan and China, blame stagnating economies on high savings rates and have implemented policies to get people to spend more.  While this is fiscally responsible from an individual perspective, its financially disastrous from a macro perspective.

  • http://www.facebook.com/profile.php?id=1063140187 Alex Shepard

    So…we give tax incentives to people to buy houses and now we want to punish them by taxing them on it?  Way to simplify the tax system…

    I love politicians attempt to equalize society by dragging the rich down, rather than trying to help bring the poor up. 

  • Shaysnh

    What about retirement savings?  You may have to live on that income for up to 30 years.  A wealth tax on that could make old age very difficult and sad.

  • Brucerobbins

    Flat tax is the way to go with 100% of all U.S. citizens paying something. For example you earn a dollar you pay $.01; you earn $100,000 you pay $5,000 or what ever percentage that gets worked out.  All with no exemptions or deductions for anything, except for companies who bring jobs shipped overseas back to the U.S. You get everybody paying, you solve our problem. But the Democrats won’t buy that, because it doesn’t fit in with the socialist model where the government provides everything.

  • Ana

    I’m not for it. Don’t think people should be taxed twice. I support a flat tax although I’m not an economist so I don’t know the pros and cons of that. Seems fair. 

  • Disappointed

    President Kennedy lowered our taxes because he understood basic economics. Please don’t encourage our politicians to add more taxes they are not affected by any of the decisions they make.

  • frank

    as an Australian, I find it fascinating and mystifying that US folk are indoctrinated to believe that they will all be millionaires one day – so they don’t want to pay higher taxes when they get there – which will probably be never.

    I used to say ‘in the US there are no poor people – only aspiring millionaires’ – but then a friend changed that to ‘only temporarily-embarrassed Billionaires’

    somewhere in all that freedom of the press has been missed the reality that the average US person is probably working too hard for too little, all the while being screwed over by the 0.01% who control the levers to their future – don’t worry, go out and shop !  – oh, you’ve got a credit card bill – don’t worry, take out a loan – you need a new car !  Bread and circuses to entertain the masses – and Nero fiddled while Rome burned …

    and the richest country in the world doesn’t have universal health care !?!  people from Europe and Australia shake their heads in amazement – you poor folk have certainly been sold a pup …

  • sschmitt

    With the wealth tax – how do you address the issue of an older person living on social security who happens to have an expensive house. Paying the wealth tax could require that person to sell their house to pay the tax. I think we need to restrict the wealth tax to those earning a minimum level of income if there is one.

    • Rowena

      That’s the equivalent of driving an expensive car, having expensive clothes – and not having an income to pay for it. If there are people living in cardboard boxes because they cannot afford ANY house – then surely the older person on social security can cope with moving to a more financially responsible house? All a matter of perspective I suppose.

  • Just Me

    The rich will be dragged down? Doubtful result. The poor are CURRENTLY being dragged down, along with the over all economy. Under the wealth tax model, the wealthy will continue to thrive, though at a more sustainable rate. Retirement savings, which should not categorically be taxed as traditional wealth would have to be addressed. Solutions are out there. It’s easy to fear that which one does not understand.