The Wealth Tax: Could It Fix Our Current Economy?

Gabrielle Karol

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?

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.

  • 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. 

    • 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.

  • 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. 

    • Devan Griffith

      There is no loss of incentive to buy a house… Unless the rich person is simply giving away their money, they will receive the same tax no matter what they spend their money on. So they are equally likely to spend on real estate then they are to put in an equally lucrative investment.

      Plus, with a wealth tax of .5% wouldn’t cause must disruption – If projecting earnings and analyzing investments, you would take a 7.5% instead of an 8% (for example). This is not earth-shattering.

      Moving away from income tax also gives more incentive to work rather than live off investment. I think this is a good thing.

      • anon

        In retirement few people get close to 8% returns unless they are doing really risky investments. Treasury bonds now are hovering around 2.5 percent. So .5 is fairly sizable. That is all really besides the point. The real problem with a wealth tax is capital flight. Basically wealthy people leave and take their companies and jobs with them to other countries. This also lowers the tax base

  • 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.

    • Devan Griffith

      There are brackets. Anyone who has saved over half a million dollars will most likely be able to adjust to .5-1.5% interest movement. Larger movements are already factored into the retirement planning platforms.

  • 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.

    • Devan Griffith

      Because those percentages affect people different. We have known this since 1912. If I only make 10,000 dollars, a flat 20% income tax takes away my ability to eat and house myself. A 20% tax on 1,000,000 dollars doesn’t change much when it comes to life stability.

    • Jim

      Absolutely agree with you. The answer is closing loopholes on deductions and the flat tax does that. Anyone who believes wealth redistribution kills the dream americans strive for….except socialist who do not want to work hard anyway.
      Now a personal note. After starting with nothing and working for 30 years to build wealth literally 12 hours a day, i am not about to redistribute my wealth….period. I also believe in paying taxes but at some point i have actually seen people decide not to work as hard with the belief it is not worth having it taxed to death. Final note ….wealthy conservatives give more than democrats do so volontarily encouraging people to give more is a better choice…..

  • 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. 

    • Devan Griffith

      If you raise wealth tax, you lower income tax.. Its simply moving the burden, not adding more taxation.

      • anon

        I think a lot of the wealthy will leave the country (as they have in France). And then the tax burden will be greater on those that remain.

  • 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.

    • Devan Griffith

      This is not adding taxes, only moving the burden away from working people.

  • 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.

  • anon

    The problem is capital flight which also leads to job loss. France has generated 2.6 billion a year through the wealth tax but has lost 125 billion in capital flight. A wealth tax sounds good but it does more harm than good. An inheritance tax would work a lot better. You also don’t have the issue of a retiree with a small income from their wealth being forced to move or move back into the workforce at 70 taking a job from a younger person leading to higher unemployment. Below is a good article on the capital flight that has been occurring in France. Also there are several countries happy to take in wealthy foreigners bringing in business and jobs fleeing a wealth tax.