Wealth taxes don't reduce inequality

The biggest problem with wealth taxes, at the center of economic policy discussions this year, isn't so much that they are difficult to collect and potentially conducive to capital flight. It's that they don't achieve their stated goal of reducing inequality.

The wealth tax proposals of U.S. presidential candidates Elizabeth Warren and Bernie Sanders are symptoms of a renewed interest in the idea of taxing not just incomes but fortunes. Perhaps the purest argument for this idea was made this year by French economist Thomas Piketty in his new book, "Capital and Ideology." Piketty's idea is to use confiscatory taxation to do away with permanent property; not even U.S. progressives go that far.

European experience shows that wealth tax receipts are usually disappointingly low: Such taxes are notoriously hard to administer and collect. That's the major reason most countries that have tried wealth taxation — there were two dozen of them in 1985 — have scrapped it (France was the latest in 2017). The four European nations that still tax wealth — Switzerland, Spain, Norway and Belgium — don't collect much revenue by doing so.

Switzerland manages the highest revenue level, 1.1% of economic output in 2018. The wealth tax there varies from 0.3% to 1% of net worth and affects middle-class residents, not only the wealthy. Because of its superior revenue generation, Edward Wolff from New York University picked the Swiss model to project onto the U.S. in a just-published working paper.

Wolff used $121,000 as the wealth threshold for married couples at which the tax would kick in, about the average of the different levels that exist in different Swiss cantons, and put the progressive tax rate at 0.05% to 0.3%.

Based on these conditions, 44.3% of U.S. households would have paid the tax in 2016, and it would have yielded $189.3 billion a year — 1% of the 2016 economic output and some 10.5% of total federal income tax revenue. From a political perspective, it would need to be weighed against the fallout from increasing the tax bill of 15% of U.S. households by more than $500. And the tax would prove rather ineffective at reducing inequality. After its introduction, the U.S.'s 2016 Gini coefficient for net worth, 0.883, falls insignificantly — to 0.8828.

That's a direct consequence of the relatively small revenue the tax would generate: It just would not give the government much money to redistribute.

Gini coefficients based on income wouldn't fall noticeably, either, if Swiss-style or Warren-style wealth taxes were introduced.

In other words, fleecing the rich would not do much to reduce inequality. The revenue raised has to be spread too thin. For all the wealth concentration statistics that Piketty and like-minded economists and politicians throw around, neither the rich alone nor the rich plus the middle class are rich enough to subsidize everyone who is poorer under any wealth tax scheme that is remotely politically feasible.

The reason European countries largely have done away with wealth taxation is that they've chosen to use highly progressive income taxes and high consumption taxes (the minimum value-added tax in the European Union is 15%, but the average is almost 22%). They are not only easier to collect: They also generate higher revenue for governments, helping control income inequality — something every European country that is a member of the Organization for Economic Cooperation and Development does better than the U.S. Flashy as wealth tax proposals may be, they just won't be as effective.

Leonid Bershidsky is Bloomberg Opinion's Europe columnist.