An income tax is not a wealth tax

By Felix Salmon
July 11, 2009

The WSJ, on both its print and its online front page, as well as in the headline of the article in question, says that the “Health Bill in House Relies on Wealth Tax“.

But the weird thing is that it doesn’t:

Under the Rangel plan, married couples making $350,000 would also be subject to a 1% surtax to cover the health plan. The levy would rise to 2% for those making above $500,000 and 3% for those with incomes of $1 million or more.

This is an income tax, pure and simple, not a wealth tax. Personally I think a modest wealth tax, in conjunction with an income tax, makes a certain amount of sense. Why tax income, which people work hard for, but not unearned wealth? But in any case, this isn’t a wealth tax, and I don’t understand why it’s being characterized as one.

Update: Tom Lindmark says he’s “not quite sure what constitutes unearned wealth”, saying that “the only way to accumulate wealth is to earn it via hard work or diligent investing”. If that’s true, then really a wealth tax is a (delayed) income tax, and so the choice between an income tax and a wealth tax basically just comes down to choosing whether you tax income as it’s earned or only after it’s been accumulated and invested.

On the other hand, I think there’s lots of unearned wealth in this world, most but not all of it in the form of inherited funds. (There’s also all those lottery winners.) To a large degree anybody who became wealthy by selling their home for much more they bought it for can’t really be considered to have been diligently investing, and can be considered one of the few beneficiaries of the housing bubble. So that wealth, too, might well be caught by a wealth tax but never by an income tax.

17 comments

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Since taxing a thing only guarantees that we’ll have less of it, I would like to see a tax on Labour socialist financial journos.

Posted by Sterling | Report as abusive

It’s quite simple why they call it a “wealth tax”: For the same reason they refer to the estate tax as the “death tax.” That is, they’re trying to spin things and make people think that this is an example of the government punishing people. If you get people thinking that the government is out to get you, then they will vote against it. It’s the classic trick of misdirection and sometimes outright lying. If you’re honest with people about how their taxes are calculated and used, they’ll be much more likely to go along with it. If you’re a rabid, “taxes are socialism” type, then you have to lie about it.

Posted by Brian P. Evans | Report as abusive

Felix: What the heck is “unearned wealth”? Presumably, you mean income from sources other than wages. But is that really any different? Think about Karl Marx. Kapital is basically saved wages (labor power). Unlike 19th century England, where labor power and surplus value were expropriated by guys like Engels to pay for their Chateau Margaux ’48, today’s wage proletarians convert their wages to capital in the form of 401Ks and in rare cases, savings outside of their retirement accounts. Since these are simply wages that have been converted to capital, the interest income they throw off is not unearned in the sense that you and Hank Paulsen, I mean Hank George, mean by unearned increment (income). Why tax the prudent? You might even be one of them.

Posted by maynardGkeynes | Report as abusive

There is a retirement book out there called “A Million Is Not Enough.” I don’t agree with everything in it, buy I do agree with the need to get families saving.

(A wealth tax starting below $5M would be seriously counterproductive to self-sufficiency in an aging population.)

The estate tax is the clearest wealth tax and the least painful. Otherwise, income is the best measure of wealth because until realized, wealth is a speculation. Only when it is harvested does wealth become real.

@Brian

Not a big point, but you’re comment is intriguing. Why would “wealth” be more politically sensitive than “income”? I feel like the “wealthy” are always some rich other that everyone can agree to tax (in NYC, for instance, we all think we’re middle-class). “Income” on the other hand, is something almost all of us earn (and hate paying taxes on).

I think I agree with you about the framing, but it seems an odd case.

Posted by ab | Report as abusive

Wealth tax, death tax….”they” are taking away what we have worked so hard to get. That is the emotion the WSJ is going for. Unbelievable. The journalistic integrity of the WSJ keeps slipping away.

Posted by scott | Report as abusive

Yea, pretty sooon, we will have an AIR BREATHING TAX, and OBAMA DRIVEWAY TOLLS on our PRIVATE LAWN.

TO FUND HEALTH CARE OBAMAMIA!

MAYBE THEN WILL AMERICA WAKE UP?

Posted by Ian | Report as abusive

I think Brian’s right, but I’d add that they seem to be using “Wealth” as a socio-economic class, rather than a type of income. Sort of like if they said “a tax on poverty.” I wonder how long it will take before we hear that one. If Sterling is right, I hope it will be soon. :-)

Posted by Linda R | Report as abusive

“When the people find they can vote themselves money, that will herald the end of the republic.”
- Ben Franklin

This is a reason long term outlooks by so many experts have dimmed, far beyond this recession.

There is hope in that there are different countries and states with different tax structures which showcase outcomes in terms of long-run growth differences.

Posted by Dan | Report as abusive

Why add the adjective “unearned” before wealth. Is there a tax regime that can distinguish earned and unearned wealth?

Oh, Felix, just when I thought you had reasonable opinions. Unearned income is really an artificial pejorative that provides political cover for governments to extract higher tax rates; note, as an example, Massachusetts taxes “unearned income” at double the rate of salary or wage.

I have unearned income, as a middle-income taxpayer, because I spent prudently and saved over the course of decades. I recognize that I have become roped into this pejorative, not because of inheritance, of which I will never receive, but because I have exhibited supposedly good behavior in my financial life.

You, however, associate me with trust fund babies and lottery winners, and I object. Is the reason for your attitude that you are one of those who cannot spend prudently and save?

Posted by Curmudgeon | Report as abusive

I highly doubt anyone will be so critical of any such tax once it’s planned purpose comes to fruition. Walking out of a hospital after major surgery and an extended stay without a bill that will take you a lifetime to repay should make a (maximum) 3% tax seem a pittance. Very few have the accessible capital or airtight insurance plan to produce the same result, and many who think they do will become quick to decry government inaction when their safety net shows a tear.

Posted by Kyle | Report as abusive

Good catch.

The tax is different from the usual income tax in that it’s a tax on gross income (eg, no deductions are allowed). It’s odd that the article was (accidentally) correct that it’s a different sort of tax then the feds typically levy but still missed the distinguishing difference.

“Presumably, you mean income from sources other than wages. But is that really any different?”

Yes. Inherited or gifted wealth is wholly gratuitous. Quite different than earned income or even investment income.

Posted by jpe | Report as abusive

Florida used to have a wealth tax. They taxed the value of intangibles, meaning the value of stock accounts. That is not an income surtax, which is your point.

Posted by jonathan | Report as abusive

>> Why add the adjective “unearned” before wealth. Is there a tax regime that can distinguish earned and unearned wealth?

Possibly not all forms of unearned wealth but some. For example a tax based on land price appreciation. If you buy land (with or without a house on it) and then sell it for a profit – that would be unearned income since no work was done.

Posted by jzw | Report as abusive

When I checked the IRS website the accumulated wealth in the USA is about 60 trillion dollars…. so a 1 percent
tax on net worth would pay for health care reform and the budget deficit. We do not tax the rich in this country we tax income…. The rich make the rules that is why this tax is never considered….

Posted by uncle f | Report as abusive