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How Wealth Tax Is Better Than Income Tax

By Jim Thio

Wealth Tax

Do you want to move money from the wealthy to the poor? Well, tax wealth.

Wealth tax causes far less market distortion, and hence, much fairer than income tax. Wealth tax hurt productivity less. If you live in a capitalistic country, then your income is yours fairly. However, Bobís wealth might not be traceable to productivity. Bob might have gotten his wealth through inheritance gained through slavery, or genocide. The link between wealth to productivity is less than the link between incomes and productivity. Hence, wealth tax discourages productivity less than income tax.

Wealth tax also has meritocratic justification that can actually increase productivity. Property rights are effectively contracts between a person and the society. Part of the contract is that the society will protect the personís property.

Well, if you protect Bobís land, you should get paid right? Wealth tax is then effectively protection fee we pay to our local gangs we call governments. How much a society should get paid for protecting wealth? Natural pricing schemes will be of course something proportional to the amount of wealth protected.

Letís examine this issue.

Wealth Tax as Protection Fee

The year is somewhere in 13th century. Kublai Khan attacked China. The peasants donít bother fighting. Why? Because all they have, their life, they can take with them in refugee. The lands belong to landlords anyway. So just let the landlord fight.

The Sung emperor realized this. So, the Sung court provided land sharing to peasants. Now the peasants have something worth dying for, land. However, itís kind of late. Also, that enraged the land owning landlords who switched side to the Mongol. There goes Sung dynasty, the most prosperous country in the world at that time.

Say a foreign investor puts 1 million dollars in 2 countries each. The first 1 million go to, hmmmÖ Letís seeÖ, Somalia, where the money just goes away through local warlords. The next 1 million goes to Singapore with its strong laws and commitment to meritocracy. In which country the $ 1 million produce higher return? In Singapore of course.

Now, say Singapore taxes wealth by 1% but gives 16% return. Say Somalia has no wealth tax but provide 0% return. Where do you want to invest your money? In SingaporeÖ

At the end, any country that can provide return on to investors will motivate investors to invest money on that country.

Countries will compete with other countries in trying to give better protection for investors. Countries that do it well can get away with more wealth tax and still be very attractive for investors. Investors will still put money in that country even though the country taxes a small percentage of wealth tax.

If governmentsí spending can be slashed, the rest can be given as dividend to all citizens in equal share for everyone manner. Karl Marx would love this, am I a commie or what? Thatíll provide incentives for citizens all over the world to vote in favor of free market, privatization, or anything that gets money in. The more investor-friendly the countries are, the more money gets in, the more dividend those citizens will get.

Some special arrangements should be around to prevent citizens from abusing the system by just making more kids to collect more dividends, but thatís easy to solve.

Less Market Distortion

Back to our sample. Say youíre equally poor. However, youíre more diligent than your peers. Then you wouldnít pay much higher tax than your peers because youíre equally poor. Hence, wealth tax do not punish the diligent as much as income tax.

When youíre richer, you can build factories rather than mansions. You donít pay extra penalty for gaining income. So, you will pay the same amount of tax whether you build factories or mansions.
It takes the same amount of military power to protect a mansion and a factory. So why in the earth factories pay more tax?

Less Repulsive Than Income Tax

Will you invest money in a country with 30% income tax or in a country with 2% wealth tax? Well it depends. If you have a good business plan, then wealth tax is preferable than income tax. Good business plan means good returns on your investments, which means high productivity, income or profit. However, if your business plan is lousy or you just want to put your money for mansions that produce no return then income tax is preferable.

Exchanging income tax into wealth tax will hurt incentives for good business plan much less. Youíre not going to be penalized for having better business plan and earning more profit.

Higher return of investments are better not only for investors but for everybody. When businesses collapse, the ones that collapse first are usually the ones with lower returns thatís just above the margin. Things go a little wrong and those bad business plans will collapse. Income tax encourages all businesses to be like that. Wealth taxes do not penalize profit and hence will increase profit.

If wealth tax is done in exchange of income tax, good investors would love it more and invest more money. Bad investors that governments will end up bailing out with IMFís help can invest somewhere else.

Doesnít Go Berserk

No people in any country, in their right minds, would demand too much wealth tax. Why? Because too much wealth tax will simply drive investors away. Some countries can demand bigger wealth tax but only if they do their homework well, such as maintaining security and explicit consistent rules.

At the end, there will be a nice supply and demand relationship where all countries try to provide the best capital protection and efficient economic and capital growth at the least possible cost or tax. The citizens in such countries can simply pocket the difference, which will be called profit. When citizens think like stock holders, then politicians will think like CEOs.

About the Author: Jim Thio is a silver medalist in International Physics Olympiad. He uses his Math skills to provide free financial, business, and marketing advices in