James Kwak: Reducing Inequality with a Retrospective Tax on Capital

James Kwak: Reducing Inequality with a Retrospective Tax on Capital

Abstract:
Inequality in the developed world is high and growing: in the United States, 1% of the population now owns more than 40% of all wealth. In Capital in the Twenty-First Century, the economist Thomas Piketty argues that inequality is only likely to increase: invested capital tends to grow faster than the economy as a whole, causing wealth to concentrate in a small number of hands and eventually producing a society dominated by inherited fortunes. The solution he proposes, an annual wealth tax, has been reflexively dismissed even by supporters of his overall thesis, and presents a number of practical difficulties. However, a retrospective capital tax — which imposes a tax on the sale of an asset based on its (imputed) historical values — can reduce the rate of return on investments and thereby slow down the growth of wealth inequality. A retrospective capital tax mitigates or avoids the administrative and constitutional problems with a simple annual wealth tax and can reduce the rate of return on capital more effectively than a traditional income tax. This Article proposes a revenue-neutral implementation of a retrospective capital tax in the United States that would apply to only 5% of the population and replace most existing taxes on capital, including the estate tax and the corporate income tax. Despite conventional wisdom, there are reasons to believe that such a tax could be politically feasible even in the United States today.

Number of Pages in PDF File: 70

Keywords: inequality, tax, capital gains, investments

JEL Classification: D63, H24, K34

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