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In the hoopla over whether Thomas Piketty’s data on growing global inequality are correct, an important question about how to address the problem has been obscured. Piketty describes his own global wealth-tax idea as more of a “useful utopia” than a practical policy suggestion. Is there anything more plausible that can be done?
Two suggestions come to mind, at least for U.S. policymakers. The first is a progressive consumption tax. This kind of tax is already embraced by many conservative thought leaders because it is, compared with other types of taxes, economically efficient. But it is efficient in no small part because it imposes a tax on wealth. People have no way to convert their money into anything they consume without paying the tax.
As William Gale and Benjamin Harris of the Brookings Institution have pointed out, the efficiency benefits from a consumption tax occur from a combination of effects, including imposing a one-time tax on existing wealth. As they note, this tax on wealth that already has been accumulated “is a major component of the efficiency gains because of the creation of a consumption tax.” The dirty little secret about consumption taxes is that their putative benefits come largely from Piketty’s core idea: a tax on wealth.
The inherent problem with a consumption tax, though, is that it is regressive, because low- and middle-income people consume a larger share of their money than high-income people do. So while a plain-vanilla consumption tax would tax wealth, it would exacerbate the core problem that Piketty is worried about.
The solution to this dilemma is a progressive consumption tax, such as the X tax proposed by the late Princeton University professor David Bradford. Under the X tax, wages are subject to a progressive tax, and business cash flow is taxed at the highest wage-tax rate. The result is a consumption tax that imposes larger proportionate burdens on high-income families than on low-income ones. This version of a consumption tax would mitigate the distributional concerns but still impose a substantial tax on existing wealth. Its parameters could be adjusted to focus increasingly on the very wealthy, rather than the merely wealthy. And yet the X tax has been promoted by the conservative American Enterprise Institute, whose economists are most unlikely to embrace a simple wealth tax.