Tuesday, May 20, 2008

Why Are We Reluctant To Tax Wealth?

Wealth inequality is far greater than income inequality. yet, wealth is taxed much less than income.

Wealth inequality is greater than income inequality because:
  • Wealth can be inherited, income cannot
  • The wealthy can accumulate more wealth. e.g. they can use rents and dividends to buy more wealth. i.e. wealth enables income without working. Those on low incomes spend all the income on living, they have no disposable income to accumulate wealth.
  • Wealth is taxed much less.
Inheriting wealth requires no effort, no skill; it has hard to argue that you deserve to inherit wealth. Yet, there is a very strong opposition to any tax on inheritance. But, there is another way of looking at the problem? why are people happy to accept a much higher tax on income?

Income tax can create disincentives to work. Corporation tax can discourage firms from investing in a country. But, a wealth tax would not discourage work. We cannot say Inheritance tax would not discourage people to be born.

People often talk about the desirability of equality of opportunity. But, large inheritance is the easiest way to ensure, society starts with unequal opportunities. At the moment we reward wealth and rent without work; but, we tax heavily income and hard work.

The irony is that a wealth tax would effect the richest 1% and richest 10% far more than the rest of society. This is because wealth distribution is more inequitable (The richest 10% own 95% of the nations wealth) most people will be better off by switching the burden of tax from income to wealth. But, when it comes to tax, people rarely act in a rational way. There is an emotive attachment to leaving money without attracting any inheritance tax. But, just because people are emotionally tied to avoiding inheritance tax doesn't mean it should form the basis of economic policy.

By the way, have you ever wondered why there are so many Russian billionaires living around Chelsea? The reason is that the UK doesn't tax people on income earnt elsewhere. Therefore, they can claim UK residency and live pretty much tax free.

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