(Written with Glen Weyl.)
Matt Klein’s post on Alphaville about a recent paper of ours made a number of errors. In that paper, we propose a “Harberger tax” on wealth: people would be required to declare their self-assessed value of their property and pay a tax on that valuation; anyone else could force a sale of the property at the declared valuation. Individuals could deduct the value of any liabilities (like debt).
Klein’s central claim is that our proposal would benefit the rich at the expense of ordinary Americans. “A purer variant of plutocracy is hard to imagine.” However, a wealth tax would fall more heavily on rich people than on middle-class or poor people. The reason is simple: rich people by definition own more property than the rest of us do. Because the distribution of wealth is highly skewed in the United States, the tax would fall far more heavily on the rich than on the poor.
Klein’s claim seems to be based on two misunderstandings of our paper. First, he appears to think that the Harberger tax is based on the nominal value of assets rather than on net worth (equity) (see section 2.7). The homes of middle class people are typically encumbered with mortgages, leaving relatively little equity to be subject to the tax. Second, Klein neglects a classic result in the theory of property taxes: imposing a tax lowers asset values. A tax of, say, 2.5% expropriates 1/3 of capital rents (if the interest rate is 5%), which would reduce the value of assets by a third.
Keeping these facts in mind, let’s consider an example. A typical American family has about $50k of income and about $80k of net worth, encompassing about $50k of home equity and $30k of other assets. A Harberger tax of 2.5% would cause this net worth to fall by about 1/3 to roughly $55k, while the annual tax payment would be roughly $1400. The tax would also generate revenue, which, according to our calculations, would generate about $14,000 per family as a social dividend. The typical family would gain on net more than $12,000 annually.
Klein also claims that wealthy people would predatorily take assets from poor people they want to harm. This is silly, as it assumes that individuals would price their assets below what they would be willing to accept for those assets, which is never true at the optimal tax rate under our system. Rich people can, at present, “predatorily” buy up assets by offering lots of money to make poor people rich. Most people don’t view this as a major threat to the well-being of the poor.
Elsewhere, Matt Levine offers some helpful criticisms about the administrative workings of our system, which we will address in due course.