How Wealth Tax Is Better Than Income Tax

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b>Wealth Tax                Part of the contract is that the
                               society will protect the person’s
Do you want to move money       property.
from the wealthy to the poor?
Well, tax wealth.                     Well, if you protect Bob’s land,
                                      you should get paid right? Wealth
Wealth tax causes far less market     tax is then effectively
distortion, and hence, much           protection fee we pay to our
fairer than income tax. Wealth        local gangs we call governments.
tax hurt productivity less. If        How much a society should get
you live in a capitalistic            paid for protecting wealth?
country, then your income is          Natural pricing schemes will be
yours fairly. However, Bob’s          of course something proportional
wealth might not be traceable to      to the amount of wealth
productivity. Bob might have          protected.
gotten his wealth through
inheritance gained through            Let’s examine this issue.
slavery, or genocide. The link
between wealth to productivity is     Wealth Tax as Protection
less than the link between            Fee
incomes and productivity. Hence,
wealth tax discourages                The year is somewhere in 13th
productivity less than income         century. Kublai Khan attacked
tax.                                  China. The peasants don’t bother
                                      fighting. Why? Because all they
Wealth tax also has meritocratic      have, their life, they can take
justification that can actually       with them in refugee. The lands
increase productivity. Property       belong to landlords anyway. So
rights are effectively contracts      just let the landlord fight.
between a person and the society.

The Sung emperor realized this.
So, the Sung court provided land      At the end, any country that can
sharing to peasants. Now the          provide return on to investors
peasants have something worth         will motivate investors to invest
dying for, land. However, it’s        money on that country.
kind of late. Also, that enraged
the land owning landlords who         Countries will compete with other
switched side to the Mongol.          countries in trying to give
There goes Sung dynasty, the most     better protection for investors.
prosperous country in the world       Countries that do it well can get
at that time.                         away with more wealth tax and
                                      still be very attractive for
Say a foreign investor puts 1         investors. Investors will still
million dollars in 2 countries        put money in that country even
each. The first 1 million go to,      though the country taxes a small
hmmm… Let’s see…, Somalia, where      percentage of wealth tax.
the money just goes away through
local warlords. The next 1            If governments’ spending can be
million goes to Singapore with        slashed, the rest can be given as
its strong laws and commitment to     dividend to all citizens in equal
meritocracy. In which country the     share for everyone manner. Karl
$ 1 million produce higher            Marx would love this, am I a
return? In Singapore of course.       commie or what? That’ll provide
                                      incentives for citizens all over
Now, say Singapore taxes wealth       the world to vote in favor of
by 1% but gives 16% return. Say       free market, privatization, or
Somalia has no wealth tax but         anything that gets money in. The
provide 0% return. Where do you       more investor-friendly the
want to invest your money? In         countries are, the more money
Singapore…                            gets in, the more dividend those

citizens will get.

Some special arrangements should      Less Repulsive Than Income
be around to prevent citizens         Tax
from abusing the system by just
making more kids to collect more      Will you invest money in a
dividends, but that’s easy to         country with 30% income tax or in
solve.                                a country with 2% wealth tax?
                                      Well it depends. If you have a
Less Market Distortion         good business plan, then wealth
                                      tax is preferable than income
Back to our sample. Say you’re        tax. Good business plan means
equally poor. However, you’re         good returns on your investments,
more diligent than your peers.        which means high productivity,
Then you wouldn’t pay much higher     income or profit. However, if
tax than your peers because           your business plan is lousy or
you’re equally poor. Hence,           you just want to put your money
wealth tax do not punish the          for mansions that produce no
diligent as much as income tax.       return then income tax is
                                      preferable.
When you’re richer, you can build
factories rather than mansions.       Exchanging income tax into wealth
You don’t pay extra penalty for       tax will hurt incentives for good
gaining income. So, you will pay      business plan much less. You’re
the same amount of tax whether        not going to be penalized for
you build factories or mansions.      having better business plan and
It takes the same amount of           earning more profit.
military power to protect a
mansion and a factory. So why in      Higher return of investments are
the earth factories pay more tax?     better not only for investors but

for everybody. When businesses        too much wealth tax. Why? Because
collapse, the ones that collapse      too much wealth tax will simply
first are usually the ones with       drive investors away. Some
lower returns that’s just above       countries can demand bigger
the margin. Things go a little        wealth tax but only if they do
wrong and those bad business          their homework well, such as
plans will collapse. Income tax       maintaining security and explicit
encourages all businesses to be       consistent rules.
like that. Wealth taxes do not
penalize profit and hence will        At the end, there will be a nice
increase profit.                      supply and demand relationship
                                      where all countries try to
If wealth tax is done in exchange     provide the best capital
of income tax, good investors         protection and efficient economic
would love it more and invest         and capital growth at the least
more money. Bad investors that        possible cost or tax. The
governments will end up bailing       citizens in such countries can
out with IMF’s help can invest        simply pocket the difference,
somewhere else.                       which will be called profit. When
                                      citizens think like stock
Doesn’t Go Berserk             holders, then politicians will
                                      think like CEOs.
No people in any country, in

their right minds, would demand

About the Author:

Jim Thio is a silver medalist in International Physics Olympiad. He uses his Math skills to provide free financial, business, and marketing advices in http://FasterFinancialFreedom.com/art.390.0.html