The Wrong Thing to Tax Is Money

I explained last month that tax revenue is meaningless. But that doesn’t mean that taxes are all together useless. Taxation can have important positive (or negative) effects on the economy. It all depends on what we tax and how we tax it. And, as it turns out, money is always the wrong thing to tax.

This must sound strange. Taxation is, after all, the taking of money. When I say we shouldn’t tax money, I specifically mean that the amount of money taxed should not depend on the amount of money or other financial assets that someone owns.

This directly contradicts the advice of famous French economist Thomas Piketty. In his 2014 book, Capital in the Twenty-First Century, Piketty advocates a global wealth tax, which is a tax on everything everyone owns, including their financial assets.

[T]axable wealth would be determined by the market value of all financial assets (including bank deposits, stocks, bonds, partnerships, and other forms of participation in listed and unlisted firms) and nonfinancial assets (especially real estate), net of debt.
— Thomas Piketty | Capital in the Twenty-First Century

To understand why this is wrong, we must first understand that the economy’s productive capacity is constrained by the availability of scarce resources—materials, equipment, land, labor, etc. Taxation can help by encouraging people to free up resources for productive use. By taxing land, for example, we can incentivize people only to hold land if they’re actually using it for something.

Money is a scarce resource too, but there are no physical constraints on money. Through economic policy, we can always create more of it. So long as we properly manage the scarcity of our economy’s money, money will never be the factor that limits our productive potential. We will always be able to provide consumers with enough spending money to take full advantage of what the economy can sustainably offer.

Of course, Piketty gets it wrong partly because he’s still thinking about tax revenues. If you want to maximize revenues, it makes sense to go to where the money is. But unlike land and other physical resources, it is not a problem for society if someone accumulates a pile of money and fails to put it to good use.

Piketty is also distracted by concerns about economic equality and justice. If we take money from the rich, it intuitively feels as if we’re helping make society more fair. But if you read my last post, you know that examining economic problems from a justice-oriented perspective can sometimes blind us to real meaningful solutions that will actually help people.

To begin with, nearly every country taxes real estate: the English-speaking countries have “property taxes,” while France has a taxe foncière. One drawback of these taxes is that they are based solely on real property. (Financial assets are ignored, and property is taxed at its market value regardless of debt, so that a heavily indebted person is taxed in the same way as a person with no debt.)
— Thomas Piketty | Capital in the Twenty-First Century

As it turns out, this is the correct way to tax property. It is not a problem when money goes unused. It is a problem when valuable land goes unused. It would be incredibly wasteful to let an empty lot just sit there in the middle of a robust and vibrant city.

Land outside of cities is important too, but for entirely different reasons. Clean air, clean water, and a sufficiently healthy natural environment are critical for humanity’s continued survival and prosperity. Any time we pollute, we use up some of our natural environment. Taxes on pollution can encourage us to carefully consider under what circumstances pollution-causing activities are really worth the cost.

No matter what resource we want to conserve, or what behaviors we want to encourage or discourage, taxation is not about the money.

At one of our Boston Basic Income discussions in June, Charlie Freifeld bravely presented his plan to use a 4% wealth tax to fund a basic income despite knowing ahead of time that I thought it was the wrong way to go.

We discussed Charlie’s plan as well as some more general questions about money, taxation, and the distribution of wealth. Partly due to their politically charged nature, these subjects can be difficult to discuss constructively.

To keep a cool head, just remind yourself that what we ultimately care about is people’s well-being and prosperity. And in doing what’s best for people, the wrong thing to tax is money.