Note that one important reason why Piketty wants a wealth tax is that this would lead to much higher quality data on the wealth distribution (I haven't read the book, but he says so very clearly in his TED talk).
> But if it's higher then the economic incentives it creates are catastrophic.
Frankly, this sounds much too alarmist. First of all, the talk is always about a progressive wealth tax in the first place. That is, few people would be affected by the highest tier.
Second, if you think about the steady state, it's clear that wealth up to the level of the highest tier of taxation wouldn't be accumulated in the first place. [0] Yes, people would try to evade taxes, but they are already doing this today. [1] More likely, this would create incentives for donations.
As a final thought, the idea of using a VAT to finance a basic income is nice, but it doesn't help against wealth inequality, because poor people generally spend a much higher fraction of their disposable income on stuff on which VAT is paid.
[0] My intuition for this comes from income taxes: During the time when highest marginal rates were much higher than today, executives didn't bother bargaining for the ridiculously high salaries that they get today, and so few people really paid those highest rates.
[1] And if you're worried about people renouncing citizenship: I think we should grow a pair and get serious about exit taxes.
The problem with this argument is that it's based in the same fantasy land where people always report all of their out of state and internet purchases to their state of residence and pay sales tax on them.
> Frankly, this sounds much too alarmist. First of all, the talk is always about a progressive wealth tax in the first place. That is, few people would be affected by the highest tier.
That actually makes it worse. All the bad still applies to the people in the highest tier, but then you have the incentive to create criminal conspiracies for the purposes of tax avoidance, because putting assets in the name of someone with fewer assets will dramatically lower the tax rate. This creates a highly profitable arbitrage opportunity except for the fact that it would presumably be illegal, leaving an opportunity for criminal enterprise to step in.
> Second, if you think about the steady state, it's clear that wealth up to the level of the highest tier of taxation wouldn't be accumulated in the first place.
> My intuition for this comes from income taxes: During the time when highest marginal rates were much higher than today, executives didn't bother bargaining for the ridiculously high salaries that they get today, and so few people really paid those highest rates.
Those numbers are very misleading. The times when the highest marginal tax rates were higher also had dramatically different tax codes. In particular, "benefits" largely weren't taxed, so instead of a higher salary you would be provided with an expensive company car and whatever else necessary to provide the required level of compensation. It's the same principle as the existing corporate income tax: High nominal rates but the majority of large corporations don't pay those rates because there are widely known ways to avoid them.
It was also much more common back then for the executives to be the owners or their friends/relatives, so their "salaries" were only coming out of their own pockets anyway.
> Yes, people would try to evade taxes, but they are already doing this today.
Because the taxes we have today are also poorly conceived. What you want is a tax which applies to a very broad base and is difficult to avoid. VAT acquits itself very well on that front.
> And if you're worried about people renouncing citizenship: I think we should grow a pair and get serious about exit taxes.
Exit taxes are hopeless. Even putting aside how easy they are to avoid, the incentive that creates for the owners of growing businesses is extremely perverse: Renounce your citizenship now before you get any bigger and owe even more.
> As a final thought, the idea of using a VAT to finance a basic income is nice, but it doesn't help against wealth inequality, because poor people generally spend a much higher fraction of their disposable income on stuff on which VAT is paid.
This is a common flaw in thinking about taxation. What you spend the money on is just as important as how you raise it. Taking $50 from someone with a thousand dollars and $10 from someone with a hundred dollars but then giving them each $30 back is progressive notwithstanding that the effective tax rate on the person with a thousand dollars is much lower. At the end of the day the person who started with $100 now has $120 and the extra $20 came out of the pocket of the person with a thousand dollars. "Effective tax rate" is a totally meaningless number without "effective government benefits."
Comparing this to the current so-called progressive system is illuminating. For example, if a person making $500K makes an extra $5000 then they pay $1750 in taxes but don't lose eligibility for any benefits they were previously eligible for. If a person making $25K makes an extra $5000 then they pay $750 in taxes but also lose eligibility for more than $1000/year in need-based programs. In practical effect the marginal rate on the person making $25K is higher. Depending on what (and how many) programs they were previously eligible for, the rate can actually exceed 100% by simultaneously eliminating eligibility for multiple independent programs.
Using VAT to finance a basic income is only useless for redistributing income if income is already well distributed[1]. Otherwise, rich people will pay the majority of it (regressive or not) and poorer people will get better off. You are right that there's always a certain income that (if rich people do really invest it all) the combination will be regressive, but it can always be made big enough that it does not matter.
Also that's ignoring all the other benefits of both the VAT and basic income, in that they are cheaper than the alternatives to administer and easier to control, offer a safety net that actually works, incentive risk taking, creates no barrier for improvement at any level...
[1] Of course, the actual numbers will depend on the VAT rate, and the amount redistributed.
Any time you're considering a tax system you have to consider the incentives it creates for people.
If you have a "wealth tax" then we have to consider how the rich will try to avoid it. First, people will convert from savings and investment to consumption. You ordinarily want to tax wasteful consumption and create an incentive for wealth creation, so that's doing the exact opposite. Second, people will convert wealth into forms that are either easy to hide from the government (e.g. gold bullion in a foreign bank vault) or are not considered wealth by the tax code or that have indeterminate market value. None of that is good.
Most importantly, the only way that a wealth tax is going to do what Piketty wants is if the rate is higher than the typical rate of return on capital. If it's lower then the effect can be no more than it would be by fiddling with the tax rate on capital returns. But if it's higher then the economic incentives it creates are catastrophic. It literally becomes more profitable to hoard cash in a mattress than invest it in anything that would disclose its existence to the government, or to move it all into foreign investments and take whatever steps necessary (up to and including renouncing citizenship) to eliminate any claim the country imposing the wealth tax has on it.
> If I had to choose, I'd tax consumption (with a VAT) and redistribute a fixed rate of it by a basic income. But that's mostly because of procedural simplicity and resistance to corruption.
This is actually a very strong alternative. VAT has an unintuitively strong similarity in effect to corporate income tax with the exception that it's much harder to avoid by diverting income to foreign subsidiaries because the VAT applies the same to imported goods as domestic. The existing corporate income tax is effectively a huge subsidy for goods imported from countries that have no or less corporate income tax.
And a basic income does exactly what you want in order to reduce the concentration of wealth: It gives people at the bottom and in the middle the ability to take the risks that promote upward mobility without having to worry about starving or freezing if it doesn't work out.