Is it viable to put a cap on personal wealth in the U.S.?

Question

Setting a cap on personal wealth is a proposal that has been championed by several progressive politicians in the U.S. (Sanders, Ocasio-Cortez, etc.). From what I understand, they argue that by setting a hard limit on wealth, the government will be able to redistribute the excess to better support people below the poverty line.

From my research on this issue, I came across literature here and here which talk about estimating affluence lines by looking at income distribution. These measurements could then help decide how much wealth would be "transferred from the richest to the poorest with a view to ensure that the latter are able to meet their basic needs and participate in society".

My question then is, from an economic standpoint, would this be a viable solution?

I would appreciate if answers to the question could be supported by reputable sources or provide links to further reading on this topic. I have no background in economics, but would like to be better informed on an issue that has entered political discourse.

Answer 1

Wealth cap that would confiscate and redistribute wealth above certain limit is in an essence just different term for wealth tax (as opposed to situations where there would be just a ban on having more wealth which would be proper cap). Consequently, to see whether such policy is optimal one has to look in literature on wealth taxes. A wealth cap that takes and redistributes wealth tantamount to 100% marginal tax rate on wealth above the 'cap' set by the policy. This is definitely not optimal (in fact one of this is the first rule that you will learn in class on optimal taxation).

First, generally speaking any top marginal tax of 100% and above is suboptimal because it removes any incentive for further economic activity, be it working when talking about income taxes or accumulating wealth. This is undesirable if the objective is to maximize the tax revenue, for lets say redistribution, because if the tax would be even just 99.9% the individual being taxed would still have incentive to be economically active and have incentive to create more wealth that then can be taxed.

Second, the literature shows that optimal top marginal wealth taxes, even in case of Rawlsian social utility function (the most redistributive social function there is), are somewhere in range 0-10% (see Kocherlakota 2005; Fama 2019; Zucman and Saez 2019) or discussion in the famous Mirrlees Review: Dimensions of Tax Design). Also, note the consensus seems to still be closer to the zero result and only very few scholars would go as high as 10%.

The reason why the optimal wealth taxes are so low even with the most redistributive social preferences is that they create very large behavioral responses that distort economy (e.g. see Jakobsen, Jakobsen, Kleven, & Zucman, 2020), they are very hard to enforce (e.g. large portion of wealth is difficult to price) and they are to a large extent implicit taxes on capital incomes (since company valuation counts as a wealth so they are further implicit taxes on wealth invested in business) and per famous Chamley-Judd result (Chamley, 1986; Judd, 1985) the burden of capital income tax is in long run shifted to labor (although the results does not hold perfectly in practice).

Such high wealth taxes could be justified only if the objective is not maximizing welfare of the poor (e.g. for example with Ralwsin max-min principle) through redistribution, but just lowering wealth inequality no matter the cost, but I don't think there are many if any economists that would endorse such course of action.

In addition, the literature cited above might be too dense for non-economist, especially if you don't have solid math background. An accessible book discussing inequality and taxation is Inequality by Atkinson. Most of the book does not focus on wealth taxes since many economists consider zero wealth taxes to be optimal, but they are mentioned in some chapters.

Answer 2

Caps on wealth is a viable option and it is not tantamount to a marginal tax of 100%. Let me explain.

We have to look at this question from the perspective of price and inflation control rather than from the perspective of punishing success to answer your question “Is it viable?”.

The main methods in controlling inflation have been monetary policy (interest rate), control of money supply, fiscal policy (income taxes), supply-side policies (increase competitiveness) and Wage/price controls (which are rarely used).

Since the WWII, most governments focused on monetary policy, control of money and fiscal policies to control inflation (the escalating cost of goods and services). This approach failed as evidenced in the escalating cost of housing and general cost of living.

I focus on increasing competitiveness and wage/price controls to prove that “Caps of wealth is a viable option”.

Since WWII, there has been great advances in technology; which should have affected prices by directly lowering the cost of production and by indirectly changing consumer behavior and market competition. Yet the cost of living now is unaffordable in major urban centers around the world. What went wrong?

The advances in technology increased productivity and profits. These profits were not redirected back to lowering the consumer prices. Instead, it allowed the rich to become richer.

For example, if a rich billionaire who made his wealth from selling electric cars; if his/her dividends from his car manufacturing is capped at a certain limit after which the surplus flows back to decreasing the price of his cars; then his product would be more competitive and would expand the business by hiring more workers. Therefore, the person would have not been punished for their success (because their enterprise expanded) but in the same time his wealth did not expand instead the cost of his products were lowered and more people were employed.

If a rich person who made billions out of oil, were to redistribute the profits that exceeds a certain cap back to the consumers of this oil products then his enterprise would become more competitive and his enterprise would expand hiring more people. The person is rewarded by the success of expanding his enterprise but his wealth would not multiply.

If the profits of a rich person who made their billions out of constructing real-estate were to redirect the profits above a certain cap back to the consumers, then the price of housing would decrease and more people would be employed in construction earning good income.

In summary, caps on wealth can provide a viable solution to controlling prices without punishing success.