The Challenge of Implementing an Inheritance or Wealth Tax

Implementing an inheritance or wealth tax may seem straightforward in theory. However, there are numerous practical challenges and potential pitfalls that governments must navigate. One common approach is to simply write the law, but the reality is far more complex.

Taxing the Living Paycheck

A pragmatic solution might be to tax every paycheck to the extent that the living cannot get ahead. If they cannot earn enough to move forward, they cannot gain any ground against the tax burden. Ideally, you would prevent people from owning any form of significant assets, such as homes or cars, by making them rent instead. They would be grateful for what is allowed, and there would be no room for collections of coins, art, or even sports memorabilia.

Strategic Tax Avoidance

Even without the tax, there is the intrinsic human desire to minimize financial obligations. If a person owes $1,000, they might be willing to spend $999 to avoid it. Therefore, if the US Federal government wants to collect $1 trillion in wealth taxes, people might spend up to $999 on lawyers, accountants, and financial planners to find a way to avoid paying. This could result in $1 trillion in legal fees, which is a substantial challenge for any government to overcome.

The Thwarting Arms Race

This scenario turns into an arms race where the only clear winners are the financial professionals. At some point, the incremental benefits of squeezing out every last dollar of wealth may no longer be worth the huge financial investment required to achieve it. This is because the cost of tax avoidance could surpass the tax itself, making it a futile endeavor.

Government Ownership and Economic Implications

A novel approach to an inheritance or wealth tax might involve astronomical assessments on estates and the option for the government to waive taxes if heirs transfer the entirety of their assets. This idea could drive small, family-owned farms out of business. With the government owning the fundamental means of production, such as land for farming, the economic landscape could be dramatically altered.

Conclusion

While the concept of an inheritance or wealth tax is appealing in theory, the practical implementation faces significant challenges. The incentive problem of tax avoidance and the potential waste of resources in finding ways to avoid the tax could undermine its effectiveness. The solution might involve strategic approaches that focus on living asset taxation and the potential restructuring of the economy itself, but even these would need careful consideration to avoid unintended consequences.