Should the US have a wealth tax?

Today’s topic is: Should the US have a wealth tax?

Let’s start with the economic logic behind it.

Economists generally agree that a much more efficient way to address inequality is by redistributing resources before markets do their work-not by trying to control prices, wages, or profits in specific sectors after the fact. A tax on wealth — especially extreme wealth — comes closest to that idea. It redistributes resources people have rather than trying to control or undo market outcomes later.

But there are two key real-world problems with a wealth tax.

The first problem is that wealthy people tend to have more options when it comes to moving or hiding assets. That means the effectiveness of a wealth tax depends heavily on its design.

If the tax is large and poorly structured, it can be easy to avoid. For example, France had a wealth tax for years, but eventually repealed it in part because of capital flight — wealthy people moved their assets, or themselves, elsewhere.

Norway is one of four countries in the world that currently has a wealth tax, charging 1.1% on assets over a certain threshold. But the tax has faced criticism for encouraging emigration and discouraging investment.

Which brings us to the second problem with a wealth tax: distortion of incentives.

A high wealth tax could reduce the motivation to build wealth in the first place-especially in fields like entrepreneurship, where there’s a chance of a big payoff but also a lot of risk. If the upside gets taxed away later, fewer people may take the risk to begin with. And that matters, because new businesses, innovations, and investments that grow into something big can create jobs, increase productivity, and generate broader economic benefits. Discouraging that kind of ambition would be a loss not just for would-be entrepreneurs, but for society as a whole.

In fact, most countries that had a wealth tax at some point have now repealed it. And it’s worth noting that the wealth taxes themselves didn’t end up raising very much money when they were in place, partly because wealthy people found ways to avoid them.

Now some might say that the way wealthy people today acquired their money is unfair or perhaps even illegal in some cases. But if there’s a problem with the way wealth is accumulated in the United States, then a wealth tax is just a Band-Aid, not a solution. The real solution to problems like these is making sure that our laws are well-enforced, that people have access to high-quality education, and that firms do not abuse their market power.

But what’s the alternative if we want to redistribute resources? There are two main ones. One that mostly functions like a wealth tax is the real estate tax, which is actually what France replaced its wealth tax with. Unlike financial assets, real estate is hard to hide and harder to move across borders, making it easier to administer. And because real estate ownership is already widely tracked and taxed at the local level, we have a solid infrastructure in place. But there are trade-offs. Real estate taxes can hit cash-poor but asset-rich households — like retirees — and can discourage housing investment if rates are too high. Still, as a base for modest taxation of wealth, it’s relatively stable and transparent.

Another promising candidate is the estate tax. Rather than taxing wealth every year, we tax large transfers of wealth at death. That’s less likely to discourage innovation or investment during a person’s lifetime, and it still allows for redistribution between generations. In fact, many economists view a well-structured estate tax as one of the least distortionary ways to raise revenue from the wealthy, especially if it includes fewer loopholes than the current version.

So, should we have a wealth tax? In theory, it’s an appealing way to reduce inequality. But in practice, it would lead to avoidance, distort behavior, and would likely raise much less money than expected. That’s why many economists see a well-designed estate tax — or a stronger property tax — as better options. They’re simpler to enforce, harder to dodge, and still focus on accumulated wealth. If the goal is to reduce inequality without causing too many downsides, these may be the smarter tools to use.

Originally published at https://mytwocentsandcounting.substack.com.