Another dissimilarity between wealth taxes and taxes on capital income is that the former often impose tax on items excluded under income taxes.
Rather than taxing wealth directly, supporters could add a provision to the current income tax code to tax an assumed fixed annual return from a measure of household wealth.
An expert study for the Mirrlees Review concluded that the wealth tax in Europe "Has been a particularly inefficient tax to collect," and that for the UK it would be "Costly to administer, might raise little revenue, and could operate unfairly and inefficiently."49 An International Monetary Fund study concluded that "Taxing income from wealth, rather than taxing wealth itself, is more equitable and efficient."50.
In another paper, Mankiw and coauthors noted that the zero capital tax prescription "Is strengthened in the modern economy by the increasing globalization of capital markets, which can lead to highly elastic responses of capital flows to tax changes even in the short run."82 They conclude that the "Logic for low capital taxes is powerful: the supply of capital is highly elastic, capital taxes yield large distortions to intertemporal consumption plans and discourage saving, and capital accumulation is central to the aggregate output of the economy."83.
A consumption tax differs from a capital income tax in its treatment of capital income only by its exemption of the safe rate of return on investment.
Rather than imposing a wealth tax or raising tax rates on capital income, policymakers should rethink the overall federal approach to taxing capital.
Economist Greg Mankiw asks, "What is the intuition for a zero optimal capital tax?" He answers, "Uniform taxation is optimal absent any differences in elasticities or cross-elasticities of supply or demand. Taxing capital income is undesirable because it means taxing future consumption more heavily than current consumption, which violates the presumption for uniformity." N. Gregory Mankiw, "Commentary," in Inequality and Tax Policy, ed.
https://www.cato.org/publications/tax-budget-bulletin/taxing-wealth-capital-income#full
Rather than taxing wealth directly, supporters could add a provision to the current income tax code to tax an assumed fixed annual return from a measure of household wealth.
An expert study for the Mirrlees Review concluded that the wealth tax in Europe "Has been a particularly inefficient tax to collect," and that for the UK it would be "Costly to administer, might raise little revenue, and could operate unfairly and inefficiently."49 An International Monetary Fund study concluded that "Taxing income from wealth, rather than taxing wealth itself, is more equitable and efficient."50.
In another paper, Mankiw and coauthors noted that the zero capital tax prescription "Is strengthened in the modern economy by the increasing globalization of capital markets, which can lead to highly elastic responses of capital flows to tax changes even in the short run."82 They conclude that the "Logic for low capital taxes is powerful: the supply of capital is highly elastic, capital taxes yield large distortions to intertemporal consumption plans and discourage saving, and capital accumulation is central to the aggregate output of the economy."83.
A consumption tax differs from a capital income tax in its treatment of capital income only by its exemption of the safe rate of return on investment.
Rather than imposing a wealth tax or raising tax rates on capital income, policymakers should rethink the overall federal approach to taxing capital.
Economist Greg Mankiw asks, "What is the intuition for a zero optimal capital tax?" He answers, "Uniform taxation is optimal absent any differences in elasticities or cross-elasticities of supply or demand. Taxing capital income is undesirable because it means taxing future consumption more heavily than current consumption, which violates the presumption for uniformity." N. Gregory Mankiw, "Commentary," in Inequality and Tax Policy, ed.
https://www.cato.org/publications/tax-budget-bulletin/taxing-wealth-capital-income#full
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