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.

  • $\begingroup$ I think you should consider changing the question in the title. I think the question in the body is more or less fine, but the question in the title is opinion based and that is considered off topic on this site (see our help center) $\endgroup$
    – 1muflon1
    Jan 18 at 3:05
  • $\begingroup$ The question has been changed. Thanks for the notice. $\endgroup$
    – guest2021
    Jan 18 at 8:56

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.

  • 1
    $\begingroup$ One thing to note about the Chamley-Judd result is that it doesn't necessarily hold even in theory, e.g. Straub and Werning (2019). The intertemporal elasticitiy of substitution is an important parameter in these discussions. $\endgroup$ Jan 19 at 15:41
  • $\begingroup$ @penGuinKeeper thanks for pointer to that new paper on the result. $\endgroup$
    – 1muflon1
    Jan 19 at 15:47

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