Inequality in income and wealth has grown very substantially in the United States in recent decades, and appears to be at a historical high. That would hardly be noticed, in a society such as ours that is strikingly free of envy, were it not for the last almost three and a half years of economic distress. The distress is not felt by the wealthy; this is noticed, and angers the nonwealthy, who are naturally inclined to think that the distress should be shared, and that increasing the progressivity of the tax system would be a step in that direction, and should be taken. Many people are worried by the nation’s huge public debt, and it is natural to think that raising taxes on the wealthy would reduce that debt by reducing the gap between government revenue and government spending. Furthermore, Federal Reserve and other regulatory officials, who I believe were (with a helping hand from many academic economists) primarily responsible for the economic distress because of unsound interest-rate and regulatory policies, and regulatory laxness, and general cluelessness, have managed to shift the blame, in the mind of the public, for the economic distress to the financial industry. Markets are Darwinian, and the industry’s reliance on short-term capital, both financial and human, compels risk taking to the farthest degree that the government will allow, and the Greenspan-Bernanke Fed and its staff and the entire financial regulatory establishment allowed too much risk taking. But this is not widely understood; the reappointment of Bernanke as Chairman of the Federal Reserve helped to conceal recognition of the point.
But as long as a substantial segment of the public blames the wealthy, the pressure for making the tax system more progressive presents a political as well as an economic issue. An increase in progressivity that does little economic harm would be a low-cost response to the political pressure, though the President’s recent proposal to tax people who earn more than $1 million at a rate that will make them pay 30 percent of their income in federal income tax carries symbolism too far. If a person who earns $1 million a year and is taxed at an effective rate of 25 percent is subjected to such an imposition, instead of paying $250,000 in taxes he will have to pay $300,000, and he will therefore do whatever it takes to reduce his income from $1 million to $999,999, as that will save him $49,999.
Marginal income tax rates can be increased slightly, deductions trimmed slightly, the budget of the Internal Revenue Service increased so that the tax laws are enforced more effectively, and income tax forms simplified, and the result of these modest measures would be a small increase in government revenues at a small—I would guess a negligible—cost in economic growth. Anything more ambitious in the way of tax reform probably is politically infeasible, given our disordered political system, and, more interesting, probably economically infeasible as well. While there are good theoretical arguments for replacing income with consumption taxes, as discussed by Becker, the administrative and transitional costs would be staggering; and so with any effort to overhaul the federal income tax system rather than just tinker at the edges of it.
Grandstand gestures like the proposed millionaire tax would have only the slighest effect in alleviating resentment at the rich, and should be understood as campaign documents rather than serious proposals.
As for a tax on wealth as distinct from income, I agree with Becker that it is an uncommonly silly idea. I would again stress issues of implementation, rather than theoretical objections (for example that the wealth tax would necessarily exclude human capital from taxable wealth, despite its importance). It would be an enormous undertaking to compel everyone in the United States (for one cannot identify who is wealthy by income alone, since one can have great wealth but a small income, depending on the form the wealth takes) to value his entire wealth honestly. Would everyone who owns a home have to submit an appraiser’s evaluation? And who would pick the appraiser?