Wealth Tax | Founders' Review Editorial

The question of how to tax wealth, or indeed whether to tax it at all, is a perennial one.

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In the United States, wealth taxes are a familiar part of the fiscal landscape. Property taxes levied on land, buildings, and even luxury yachts are a significant revenue stream for counties. These funds are channeled into essential government services such as education, utilities, and law enforcement. The underlying logic is that these taxes function much like use taxes, where the cost of using city infrastructure, such as roads, is proportionate to the value of a building, which in turn increases with the number of residents.

Typically, property taxes hover around 1-2% of the property's purchase price. While this doesn't erode ownership over time, it does have a depreciative effect on the building's value. However, many would argue that the services funded by these taxes actually enhance property values, compared to the alternative of pothole-ridden roads, malfunctioning street lights, or under-resourced schools.

The prevailing wisdom in economic research is that a property's value is determined by its annual recurring income. This theory posits that a machine, for instance, should be taxed not on its value, but on the income it generates.

This principle underpins the federal tax system, which primarily levies income taxes, particularly on businesses classified as C corporations. The appeal of this approach is its simplicity: adjusting the tax burden is as straightforward as tweaking a percentage. Introducing a wealth tax would draw from the same income pool, but with the added complications of valuation, collection, and dispute resolution, all of which represent fixed costs for the federal government.

Some states also impose income taxes, with notable exceptions such as Washington State. Counties that eschew income taxes have direct records of secured properties like land and buildings, which simplifies the process of levying wealth or property taxes. The information is readily available, eliminating the need for taxpayers to file another return.

The value of wealth or property is typically proportional to the income it generates. In the case of commercial real estate or landlords, this is represented by rent. Residential property prices can be determined by the number of jobs and the wages available within commuting distance.

There are distinct advantages to collecting taxes close to where the income is generated. Cash is readily available, records are easily accessible, and enforcement can be handled by local authorities. All of these factors mitigate the risks associated with tax collection.

The Nash equilibrium eventually settles into a predictable pattern.

Income taxes will always constitute the lion's share of tax revenues, given the ready availability of cash in the form of retained earnings. Federal and state governments will naturally gravitate towards a return and tax collections. Since wealth is proportional, they can simply adjust the rates as needed.

Municipal governments, on the other hand, have a vested interest in raising their own taxes to fund education, roads, and law enforcement. It's relatively easy to levy taxes on property located within the boundaries of a county or township, given the availability of records and the control they exert.

Any tax-related disputes inevitably become a tug-of-war between local and federal governments. The resulting compromise can help both levels of government meet their respective needs, providing a simpler solution than negotiating a distribution across counties and cities from a federal budget with potentially competing interests.