Would a wealth tax work? Lessons from the local property tax

Blogger of the Week: Isaac William Martin
University of California, San Diego

Thomas Piketty’s Capital in the 21st Century calls for a global regime of wealth taxes in order to prevent extremes of inequality. We already have an example of a wealth tax regime that has operated for more than 200 years in an open economy—the local property tax in the United States. How well has it reduced inequality?

Not well, and the reasons why are instructive.

The first reason the property tax doesn’t much reduce inequality is that it applies to very few categories of assets. Mainly it’s a tax on the value of real estate. That’s a big part of what makes the tax administratively feasible for local governments. It’s much easier to measure the value of a house, for example, than it is to collect accurate information about all of the assets and liabilities of the people who live in it. But it’s also what makes the tax less progressive than it might otherwise be. Working-class homeowners pay tax on their homes even if they owe a lot of mortgage debt. Rich people are set apart by their financial assets, and those don’t get taxed.

A second reason is economic segregation. In places where all the property is expensive, even a small tax rate will generate enough revenue to run a local government. In places where property is cheap, tax rates are higher, because people in these places need more government services and because it takes a high tax rate to get enough revenue from a small tax base. (Racial segregation also makes the property tax unequal. As Kevin Beck and I have shown, white homeowners pay the lowest property tax rates on average, and have benefited disproportionately from the late-twentieth-century property tax revolt.)

A third reason is that tax competition keeps the rates low. No local government wants to be the one with the highest tax rate. Many local officials are afraid that people would vote with their feet and their investment dollars for the next suburb over.

A fourth reason is that attempts to increase property taxes are often blocked by popular resistance. Property taxpayers tend to be especially effective at the ballot box, because they are numerous, organized, and concentrated in particular electoral districts.

Are these reasons to be skeptical of Piketty’s wealth tax proposal? Not necessarily. An internationally coordinated tax on net wealth such as Piketty has proposed obviously would be more egalitarian than a local tax on a single kind of asset.

But they do identify some of the obstacles to realizing the goals of a wealth tax. Economic segregation, tax competition, and tax resistance are all realities at the global level, too. Governments in poor countries might not get much revenue from a wealth tax unless they set the rates prohibitively high. International cooperation in setting tax rates is even harder than inter-local cooperation. Financial assets are easier to move, and easier to hide, than real estate. Rich people mobilize politically when you threaten to tax their assets.

Of course, if you accept the arguments for a wealth tax, then you might simply see these as reasons to try harder. Piketty’s taken a lot of flak from people who think that his wealth tax idea is unrealistic, and he’s responded, reasonably enough, that every big redistributive policy seemed unrealistic until it happened. The progressive income tax in the United States, for example, started out as a utopian idea. It took dozens of campaigns for state and local tax reform, and decades of struggle by huge social movements, culminating in an amendment to the Constitution, to make it a reality.

Isaac William Martin is professor of sociology and a faculty member in urban studies and planning at the University of California – San Diego. He is currently a visiting scholar at the École des Hautes Études en Sciences Sociales in Paris. His last two books are Foreclosed America (with Christopher Niedt, 2015) and Rich People’s Movements (2013).

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