>If you have a bucket of money that isn't doing anything, then what value does it actually bring to the economy
Wealthy people don't just leave their money under a mattress, they invest it in something. Even if they just left it in a bank, the bank is still going to lend that money out and invest it. Taxing wealth just encourages riskier investments, as higher risk is needed to achieve comparable post-tax return.
That effect would make startups more attractive. But it would be completely cancelled by a countervailing effect: the wealth tax strongly incentives liquid investments. Which of course heavily penalizes investing in startups as they're small, speculative privately-held, hard-to-value companies.
Currently investment is only taxed on a "realized basis". No tax bill is due until the investor realizes a cash profit, either by receiving a dividend or harvesting capital gains on sale of the asset. In contrast a wealth tax is assessed every year, regardless of whether the investor has actually earned any actual income.
Under current tax law, an investor is not penalized for continuing to hold a high-value asset. In contrast under a wealth tax regime, an investor would be forced to sell some portion of his portfolio every year just to pay his tax bill. That heavily favors large, liquid, public companies over startups. Selling a million dollars of Amazon shares is as easy as pressing a button. Selling a million dollars of a Series-A startup, especially at a fair price, is really hard.
This would especially impact early-stage employees, who usually hold a very high fraction of their net worth in their stock options. At least VC investors usually have other holdings that they could liquidate to pay their annual wealth tax.
Imagine you own 20% of a company with a $50 million valuation. On paper, you're a deca-millionaire. But in reality you could easily have an overdrawn checking account. How do you get your hands on $100k in cash to pay your tax bill? There's no real market to sell your shares, and very likely you can't even do so without board approval. You could borrow the money, but if the company fails, you're now left with huge debt and worthless equity.
In all likelihood a wealth tax would pretty much destroy the Silicon Valley startup ecosystem. Or at least remake it into something totally unrecognizable.
Evidence points to the contrary: Taxes reduce profitability and therefore limit risk taking behaviour by companies. Same is most likely true for individuals because it reduces their income.
> Taxes reduce profitability and therefore limit risk taking behaviour by companies.
But taxes provide services that give people a greater safety net. Healthcare is the canonical example but there are many other ways that taxes can help ensure that one mistake does not ruin the rest of your life.
Personally, I would love to live in a country where businesses took fewer risks and individuals could take more.
Exactly. Capital gains tax is equivalent to a wealth tax on appreciating assets only, which is the only kind of assets you should be targeting with a wealth tax. So just implement a sensible capital gains tax, and you're done.
Considering it's the ones who hold the largest pools of assets affected who can buy the changes to the tax code to build loopholes to get themselves exempted, that seems about impossible.
Assuming your thesis that taxing wealth encourages riskier investments for a minute. Why is that a problem? Isn't putting money into riskier assets a good thing for long term advancements in asset classes with high potential reward?
It doesn't seem like low risk investments like sticking money in the bank to be lent as mortgages or investing in government bonds are as good for humanity over the long term.
“Riskier”, but how much riskier? Having to beat inflation by 1% is not that much riskier compared to the gained equality in taxation. Bad argument. You can’t leave off the amount and implicitly use the worst case scenario to argue against all cases.
Considering the risk-free interest rate in the US is currently around 0.7%, finding a low-risk extra percentage point return is non-trivial. Most of these people have wealth managers or invest in funds; you think if they could earn an extra percentage point return without much risk, they wouldn't already be doing that?
Wealthy people don't just leave their money under a mattress, they invest it in something. Even if they just left it in a bank, the bank is still going to lend that money out and invest it. Taxing wealth just encourages riskier investments, as higher risk is needed to achieve comparable post-tax return.