Why Higher Tariffs and a Wealth Tax Won’t Work

Tariffs and wealth taxes come with a lot of baggage.

Let’s see what they carry with them.

New Taxes

Tariffs

Some headlines have suggested we might be able to eliminate the income tax. Instead, revenue could come from tariffs. Because, each year, the income tax generates close to $2 trillion from corporations and individuals, we would need a similar amount from taxes on imports.

Impossible.

During 2021, with the value of imported goods at approximately $2.8 trillion, the tax revenue was approximately $80 billion. To get more, we would have needed a whopper of a tax rate. However, such a huge percent would immediately dissuade people from buying those items. As a result, revenue sinks and the need for a higher rate goes up. And we feed inflation.

Some say a Trump proposal of 10% on all imports and 60% for Chinese made items could take in $225 billion. However, once the ripple of externalities unfolded, the dollars sink. We would see retaliation against exporters, a bigger deficit, and more debt. In addition, the Peterson Institute predicts an appreciating dollar further constrains exports.

These projections suggest tariff rates could not surpass 50%:

Wealth Tax

Expressed by U.S. politicians as a 2% tax on the net worth of households between $50 million and $1 billion, a wealth tax sounds simple.

It’s not.

It all depends on what you call wealth, which wealth you tax, and where it is located.

These are some of the possibilities:

Countries

As a result, the trend is indisputable. Most of the countries that had what they called a wealth tax have eliminated it. From a peak of 14 (other sources say 12), we are down to an OECD four, Colombia, Switzerland, Norway, and Spain:

Why? In many ways, taxing wealth can distort what government does and how taxpayers act. On the administrative side, designing and collecting the tax can require a disproportionately large task force. As for the affluent who are taxed, the incentives create unintended consequences. Someone’s wealth could be composed of illiquid assets that need to be sold to pay a tax bill. Young people might not want to save. A tax on wealth could dissuade people from taking risks and becoming entrepreneurs. In France, while 42,000 millionaires reputedly left the country, we can say for sure that the incentives nudge people away.

Revenue

With Switzerland achieving the most success, countries with a wealth tax exert a lot of effort to get a relatively small return:

Our Bottom Line: Kinds of Taxes

As economists, looking at taxes, we can create three buckets. In one we would place progressive taxes, a second bucket has regressive taxes and the third is the proportional group.

Like the U.S. income tax, with a progressive tax, the more affluent pay a higher percent of their income. Consequently, individuals that earn $11,600 to $47,150 pay a 12% rate. Then, climbing the income ladder, step by step, rates rise from 22% to 37%:

Meanwhile, the less affluent pay a higher percent of their income with regressive taxes. As a result, sales taxes are regressive. When we make a $100 purchase and pay a 10% rate, the tax is ten dollars. If you earn $1000 a week, $10 is a bigger proportion than for a $2000 paycheck. Lastly, we have proportional taxes. Like their name, they take the same percent from everyone’s income. At 3% (or 1.45% if your employer pays half), the Medicare tax taken from our paycheck is a proportional tax.

When we perceive a tariff as similar to a sales tax, it falls into the regressive bucket. Quite different, wealth taxes are progressive.

My sources and more: Thanks to PIIE for inspiring today’s post and Axios for additional facts. Meanwhile, most of our wealth tax information came from this Tax Foundation paper.

Please note that we’ve quoted several sentences from a past econlife post on wealth taxes.