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How Wealth Tax Is Better Than Income Tax
By: Jim This
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, Bob’s 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 person’s
property.
Well, if you protect Bob’s 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.
Let’s examine this issue.
Wealth Tax as Protection Fee
The year is somewhere in 13th century. Kublai Khan attacked China. The peasants
don’t 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, it’s
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, hmmm… Let’s see…, 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
Singapore…
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 governments’ 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? That’ll 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 that’s easy to
solve.
Less Market Distortion
Back to our sample. Say you’re equally poor. However, you’re more diligent than
your peers. Then you wouldn’t pay much higher tax than your peers because you’re
equally poor. Hence, wealth tax do not punish the diligent as much as income
tax.
When you’re richer, you can build factories rather than mansions. You don’t 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. You’re 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 that’s 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 IMF’s help can invest somewhere else.
Doesn’t 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 This is a silver medalist in International Physics Olympiad. He uses his
Math skills to provide free financial, business, and marketing advices in
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