A wealth tax wouldn’t make the poor wealthier
One of these strange but true things. A wealth tax wouldn’t make the less wealthy wealthier. Apologies for making heads explode and all that but this is, in fact, true.
When we tax richer people on their income and give it to poorer people as an addition to their income then those poorer people are of course richer. They’ve got more cash, have a higher income. We include this in our calculations of income inequality too, as we should. Even those measures of relative poverty are after taxes and benefits.
This is entirely separate from whether we should be doing this, should not be, are damaging the economy by doing so and all that. It’s just the observation that we do count the money given to top up in the incomes of the poor when we measure income by poverty.
We do not do this with wealth. This is something that it’s important to understand when people chunter on about wealth inequality and how, therefore, we’ve got to tax the really wealthy in order to redistribute it. For example, the JRF:
The average family in the poorest 10% of families has negative net wealth (such as their debts exceed their assets) (Advani et al., 2021). The bottom 2% have just £2,500 (including household physical assets). At least half of the bottom 10% only held wealth in physical assets (with a mean value of £8,000)
We could (well, we couldn’t, but as an exercise in logic) tax all the wealth off all the rich and ship that off to the poorer in goods and services, income tops ups and so on. This would change that wealth distribution to the poor by not one iota, not one pound nor even penny. Because we don’t count as wealth the things that are sent to the poor via government action.
Formally, from Saez and Zucman:
Our definition of wealth includes all pension wealth— whether held in individual retirement accounts, or through pension funds and life insurance companies—with the exception of Social Security and unfunded defined benefit pensions. Although Social Security matters for saving decisions, the same is true for all promises of future government transfers. Including Social Security in wealth would thus call for including the present value of future Medicare benefits, future government education spending for one’s children, etc., net of future taxes. It is not clear where to stop, and such computations are inherently fragile because of the lack of observable market prices for these types of assets. Unfunded defined benefit pensions are promises of future payments that are not backed by actual wealth. The vast majority (94% in 2013) of unfunded pension entitlements are for government employees (federal and local), thus are conceptually similar to promises of future government transfers, and just like those are better excluded from wealth.
The NHS is not counted as wealth, free education is not, the benefits system is not wealth, not just the state pension but a civil service pension - a doctors pension! - is not wealth. But all of these things are wealth. And that they are funded by a progressive taxation system - as they are - means that we already have a considerable redistribution of wealth in this country.
It’s very easy indeed to tot up that absolutely every citizen in the country has a half million or so of wealth. Free lifetime healthcare is perhaps £250,000 - that’s, -ish, what it costs to provide. Free education per child costs £90,000 or so - per child again. The state pension has an actuarial value of £150,000 or so. And so on. Simply by being born British people have a half million in wealth before we think of the insurance value of the welfare state and so on.
But, as above, all that wealth is not counted when we discuss the wealth distribution. Which does mean that if we tax the wealthy harder to spend on more of these things for the less wealthy then, by the measurement system we use, we’ve not made those poorer any wealthier at all. Which isn’t a good way to be doing the counting.
Of course we’re against a wealth tax for that’s an idiot idea. But moving from opinion, however based, to irrefutable fact. We do not measure wealth properly at present, therefore we don’t measure wealth inequality correctly. Which seems like the first thing we need to be doing if we’re going to then discuss whether we want to change that wealth distribution.
For, as above, it really is true that given the way we measure these things we could double pensions, triple the NHS and cost every school in the country at Eton levels and we’d not have increased the wealth of those who get pensions, health care or education by one iota nor penny. Which is not just insane it’s misleading.
Tim Worstall