By: Leandra Lederman
On February 15, the Indiana University Maurer School of Law welcomed Prof. Ari Glogower from Ohio State University Moritz College of Law as the third speaker of the year in our Tax Policy Colloquium. Ari presented his paper titled “Taxing Inequality,” which argues in favor of a federal wealth tax and proposes a mechanism for integrating the base of such a tax with the base of the federal income tax. Ari’s paper sparked a really interesting discussion both in and outside the workshop on a wide range of issues, from distributive justice to the mechanics and likely impacts of his proposal.
The paper focused first on why we should have a federal tax on wealth. The draft points to rising economic inequality, and it grounds the need for a wealth tax in the theory of “relative economic power.” That theory, borrowed from political science, focuses on spending power—as opposed to actual spending—as a source of economic power. The basic idea is that the mere ownership pf wealth creates economic power without spending it. Moreover, “excessively unequal distributions of economic resources and market power can result in unequal divisions of political and social power as well.” (p.19) One of Ari’s paper’s contributions is to apply this economic-power theory as a justification for a progressive tax system.
The draft then describes the problem that tax-system designers have in imposing both a wealth tax and an income tax. Because the two types of taxes are imposed on different bases, if the taxes are not coordinated, taxpayers with very different abilities to pay based on their income or wealth may be taxed identically. The paper includes some nice examples of taxpayers with the same income but vastly different stocks of wealth and vice versa. It shows, for example, that a taxpayer with $200,000 of current income and no wealth (or negative wealth in the form of student-loan debt) has lower ability to pay than a taxpayer with $200,000 of current income and $35 million in wealth. (Ari’s talk included a great slide featuring an image of Scrooge McDuck swimming in money as the wealthy taxpayer, but for whatever reason, he resisted our suggestion to rename the paper “Taxing Scrooge McDuck”!)
In its final major section, the paper turns to Ari’s proposal to integrate the bases of income and wealth taxes and impose a progressive tax on this base. The mechanism is to recharacterize wealth as an annuity with a period spanning the remainder of the taxpayer’s life expectancy. An annual portion of that deemed annuity is added to the taxpayer’s labor income for the year to produce the combined tax base. For example, under the simplest method Ari proposes, a taxpayer holding $35 million of wealth on the measurement date and with a 35-year life expectancy would have $1 million of the wealth attributed to the year in question; this amount would added to the taxpayer’s income for the year to yield the combined tax base of income and wealth.
The proposal does not anticipate every possible issue that could arise, or close all tax-avoidance opportunities, and it could of course be tinkered with, but it is a creative solution to integrating the bases of two very different taxes. Its basic idea is to avoid overburdening existing capital, capital income, or labor income, while accomplishing redistribution that avoids dynastic wealth. If applied to accomplish its redistributive goals, it could potentially raise more taxes from the wealthiest individuals in our society than our current federal income tax (assuming political feasibility).
The paper is ambitious in making two distinct contributions, and the technique for integrating the income tax base with a wealth tax is, in and of itself, a major contribution to the literature. Thank you again to Ari for sharing his interesting and ambitious paper with us, and for a terrific talk!
Maurer’s Tax Policy Colloquium series will continue on February March 1, with Surly’s own Prof. Diane Ring from Boston College Law School presenting “Silos and First Movers In the Sharing Economy Debates.”