By Jim Thio
Do you want to move money from the wealthy to the poor? Well,
Wealth tax causes far less market distortion, and hence, much
fairer than income tax. Wealth tax hurt productivity less. If
you live in a capitalistic country, then your income is yours
fairly. However, Bobís wealth might not be traceable to
productivity. Bob might have gotten his wealth through
inheritance gained through slavery, or genocide. The link
between wealth to productivity is less than the link between
incomes and productivity. Hence, wealth tax discourages
productivity less than income tax.
Wealth tax also has meritocratic justification that can
actually increase productivity. Property rights are
contracts between a person and the society. Part of the
is that the society will protect the personís property.
Well, if you protect Bobís land, you should get paid right?
Wealth tax is then effectively protection fee we pay to our
local gangs we call governments. How much a society should get
paid for protecting wealth? Natural pricing schemes will be of
course something proportional to the amount of wealth
Letís examine this issue.
Wealth Tax as Protection Fee
The year is somewhere in 13th century. Kublai Khan attacked
China. The peasants donít bother fighting. Why? Because all
they have, their life, they can take with them in refugee. The
lands belong to landlords anyway. So just let the landlord
The Sung emperor realized this. So, the Sung court provided
land sharing to peasants. Now the peasants have something
dying for, land. However, itís kind of late. Also, that
the land owning landlords who switched side to the Mongol.
There goes Sung dynasty, the most prosperous country in the
world at that time.
Say a foreign investor puts 1 million dollars in 2 countries
each. The first 1 million go to, hmmmÖ Letís seeÖ, Somalia,
where the money just goes away through local warlords. The
1 million goes to Singapore with its strong laws and
to meritocracy. In which country the $ 1 million produce
return? In Singapore of course.
Now, say Singapore taxes wealth by 1% but gives 16% return.
Somalia has no wealth tax but provide 0% return. Where do you
want to invest your money? In SingaporeÖ
At the end, any country that can provide return on to
will motivate investors to invest money on that country.
Countries will compete with other countries in trying to give
better protection for investors. Countries that do it well can
get away with more wealth tax and still be very attractive for
investors. Investors will still put money in that country even
though the country taxes a small percentage of wealth tax.
If governmentsí spending can be slashed, the rest can be given
as dividend to all citizens in equal share for everyone
Karl Marx would love this, am I a commie or what? Thatíll
provide incentives for citizens all over the world to vote in
favor of free market, privatization, or anything that gets
money in. The more investor-friendly the countries are, the
more money gets in, the more dividend those citizens will get.
Some special arrangements should be around to prevent citizens
from abusing the system by just making more kids to collect
more dividends, but thatís easy to solve.
Less Market Distortion
Back to our sample. Say youíre equally poor. However, youíre
more diligent than your peers. Then you wouldnít pay much
higher tax than your peers because youíre equally poor. Hence,
wealth tax do not punish the diligent as much as income tax.
When youíre richer, you can build factories rather than
mansions. You donít pay extra penalty for gaining income. So,
you will pay the same amount of tax whether you build
It takes the same amount of military power to protect a
and a factory. So why in the earth factories pay more tax?
Less Repulsive Than Income Tax
Will you invest money in a country with 30% income tax or in a
country with 2% wealth tax? Well it depends. If you have a
business plan, then wealth tax is preferable than income tax.
Good business plan means good returns on your investments,
which means high productivity, income or profit. However, if
your business plan is lousy or you just want to put your money
for mansions that produce no return then income tax is
Exchanging income tax into wealth tax will hurt incentives for
good business plan much less. Youíre not going to be penalized
for having better business plan and earning more profit.
Higher return of investments are better not only for investors
but for everybody. When businesses collapse, the ones that
collapse first are usually the ones with lower returns thatís
just above the margin. Things go a little wrong and those bad
business plans will collapse. Income tax encourages all
businesses to be like that. Wealth taxes do not penalize
and hence will increase profit.
If wealth tax is done in exchange of income tax, good
would love it more and invest more money. Bad investors that
governments will end up bailing out with IMFís help can invest
Doesnít Go Berserk
No people in any country, in their right minds, would demand
too much wealth tax. Why? Because too much wealth tax will
simply drive investors away. Some countries can demand bigger
wealth tax but only if they do their homework well, such as
maintaining security and explicit consistent rules.
At the end, there will be a nice supply and demand
where all countries try to provide the best capital protection
and efficient economic and capital growth at the least
cost or tax. The citizens in such countries can simply pocket
the difference, which will be called profit. When citizens
think like stock holders, then politicians will think like
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