As part of the Pepperdine Law Review Symposium The Impact of the 2017 Tax Act on Income and Wealth Inequality: Lessons for 2020 and Beyond, this Essay compares two reform directions to rebuild the progressive tax system: an improved capital income tax—which would eliminate the benefit from deferring gains until a sale—or a wealth tax. The Essay first introduces the concept of a “rate-equivalent” wealth or capital income tax as a way to assess reform alternatives consistently and to identify the assumptions as to how the reforms would be structured. For any chosen capital income tax (or wealth tax) reform, the rate-equivalent wealth tax (or capital income tax) is the tax yielding the same tax liability for a taxpayer earning a specified investment return rate. The Essay then illustrates how this concept can help illuminate the assumptions behind comparisons of wealth tax and capital income tax reforms in the literature. Some views in the literature suggest that policymakers should favor an improved capital income tax because the two reforms can have comparable economic effects, while a capital income tax is more desirable in other respects. The Essay surveys the literature evaluating three aspects of these reforms—their economic effects, administrability and avoidance opportunities, and constitutionality—and offers additional perspective on how in each area the distinctions between the two reforms are often narrower than they are sometimes assumed to be in the literature. In many cases the analysis of these reforms will also depend on the particular manner in which each reform is structured or the baseline against which the reform is measured. For this reason, policymakers should not reach categorical conclusions that one reform direction is intrinsically more desirable than the other. The Essay concludes by considering one respect in which an improved capital income tax or a wealth tax can unambiguously differ: as different measures for comparing taxpayers in a progressive tax system. This distinction, however, will depend on the normative choice as to how inequality should be measured and mitigated by the tax system. For example, the choice between a capital income tax and a wealth tax could have different consequences, depending upon whether one assumes that the progressive tax system should mitigate differences in utility, income, wealth, or a combination thereof.
Comparing Capital Income and Wealth Taxes,
48 Pepp. L. Rev.
Available at: https://digitalcommons.pepperdine.edu/plr/vol48/iss4/1