The Corner

Productivity Tax

From a reader: 

Jonah,

Please be careful when discussing income taxes and “the wealthiest…”

Income taxes tax those who have high taxable incomes. Income taxes are biased toward taxation of productivity. The relationship to wealth is greatly attenuated.

Many of the wealthy have relatively low taxable incomes (e.g., the idle rich). Furthermore, the yearly increase in the wealth of many of the wealthy is often untaxed. If some upper middle class guy wants to add to his wealth by working 500 hours of overtime next year, he will be severely taxed. If Teresa Heinz Kerry’s stock holdings appreciate and increase her wealth, she pays no taxes unless she sells (and then at a low rate).

There are a lot of hard working people out there with taxable incomes similar to or greater than may of the true rich. Imagine some guy with a taxable income of $200k who manages to save $20k of that as his yearly wealth increase. Compare that with a member of the idle rich who also has a taxable income of $200k, but also has substantial appreciating assets (e.g., a stock portfolio that increases by $5 million in value). An increase in tax rates might wipe out the entire yearly wealth increase of the middle class person, while leaving the actual wealthy person relatively unscathed.

Thus, please do not fall into the trap of saying you want to tax the wealthy when the result is taxing the productive. If you want to tax the wealthy, then tax wealth, not production.

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