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Study Suggests Wealth Tax Gets More Bang for Buck Than Capital Gains Tax

Chris Gaetano
Published Date:
Sep 25, 2019
A wealth tax, a concept that's been bandied about by both Bernie Sanders and Elizabeth Warren, is a controversial proposition in many business and finance circles, but a recent study published by the National Bureau of Economic Research suggests that it theoretically could be better for the economy than the current tax on capital income. 

Their reasoning is that, under capital income taxation, "entrepreneurs who are more productive, and therefore generate more income, pay higher taxes" while, under a wealth tax, productivity is taken out of the equation entirely, which shifts the burden toward unproductive entrepreneurs and raises the savings rate for the productive ones. In essence, the NBER paper is arguing that wealth doesn't really do much just sitting there, and so a tax on wealth would present a sort of "use it or lose it" proposition to entrepreneurs: either invest it somewhere useful or watch it slowly evaporate on its own. As most people would likely prefer the former to the latter, it is believed that a wealth tax would spur additional investment. 

To test this hypothesis, the economists built a simulated model meant to match U.S. data, which replaced capital gains taxes with a wealth tax in a revenue-neutral fashion. They found, in this model, that the wealth tax delivers about 7.5 percent more "in consumption-equivalent terms"  in lifetime utility to a newborn. In contrast, taxing capital gains to the same degree delivers largely negative results and has lower welfare gains.    

The economists also tested to see how individuals would fare in the event of a shift from capital income to wealth taxes. Those who are alive at the start of the change, said the paper, would actually "experience large welfare gains" in such a transition. 

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