Wealth Taxes and Immigrants

Tyler Cowen’s new column for the New York Times concerns the rising wealth-to-income ratio in rich countries, and the opportunities thereof. While you’ll always find a lonely voice calling for wealth taxes, economists have largely ignored the possibility for the greater part of the last fifty years considering the strong theoretical challenges they pose. But as Cowen notes, the divergence between capital and income has become too remarkable to ignore: that agnosticism to this dynamic is no longer an option.

This is a long conversation, but I want to highlight something that very few (if any, aside from legalese) have mentioned as a positive to taxing wealth instead of income: its effect on skilled immigration. Indians, as an annual ritual, open the pages of The Hindu to see offers made by American giants to IIT “toppers”. Last year it was Facebook at over $100,000.

This is to say that if skilled wages in India aren’t already at parity, they will be rapidly. This isn’t surprising, educated and entrepreneurial folks are far more geographically mobile, and we would expect factor price equalization to occur more rapidly. Anecdotally, mid to senior management level positions also seem to pay almost 80% of American salaries.

Immigrants very rarely have any wealth. Those from developing countries might be entitled to old land, but by and large not much more. In this sense, income taxes are deeply inegalitarian compared with wealth taxes. We’re essentially putting the high-income, but poor, immigrant on the same level as established families with inordinately higher net worth, but a similar income.

This is economically, and depending on your justification for taxation morally, inexpedient. The most probable form of wealth taxation is likely to take the form of imposing the necessary wealth tax only after a relatively high entry level. For example, I’ve shown that it’s possible to eliminate much of the income tax with a wealth levy on estates greater than $250,000 in value. This addresses a bulk of the standard economic argument against wealth taxes:

  • An overwhelming number of Americans don’t have near $250,000 in wealth, and most live paycheck to paycheck. Since the $250,000 barrier is out of reach, there will be no real disincentives to save (and can hence be glued with a progressive consumption tax to encourage savings).
  • Those that do “qualify” for the tax are likely to have a relatively low marginal propensity to consume anyhow.

If a wealth tax replaced income taxes, it basically tells high-end immigrants “please come over, we won’t tax you immediately”. No doubt, skilled programmers (especially those with six-figure starting salaries) will eventually be subject to wealth taxes – whether they start at $250,000, $500,000, or likely even more – but not the second they get there. It’s basically an affirmation of the stereotypical American dream “we’ll let you make it before we tax you”.

There are many high-end immigrants today wondering why they should go to the United States (forget Europe) for marginally higher salaries, only to be taxed at relatively high rates, when they can stay home – where they have land wealth and family – instead.

Over a period of the immigrant’s lifetime – especially if he or she is successful – there’s a good possibility a wealth tax will extract more revenue. But this is deferred to the future. Hyperbolic discounting will attract many young, high-potential but poor immigrants to come today. At six-figure incomes if national, state, and local taxes eat between 30 and 40% of my salary in Silicon Valley that – whether liberals like it or not – is a disincentivizing factor. And not one in America’s favor.

Now a small detour on the moral case. A common justification for taxes is thus:

  • It is necessary for social rebalancing and investment in infrastructure, education and, when applicable, war.
  • It is the “repayment” for “using” social infrastructure as manifest in schools, roads, and employment opportunities.

But immigrants haven’t “used” American public education or services. In fact, foreign institutions have subsidized their education, only for the taxes to be paid in the United States. This weakens the moral justification for income taxes insofar as immigrants are concerned. Wealth taxes are immune from this critique, as buildup of wealth from saving in the United States represents the extent to which I “used” American services to earn that wealth.

Much of this argument can be extended to high-earning individuals originating from low-income families. It seems unfair – at least initially – to tax the “rags to riches” engineer at the same rate as we do the blue-blooded investment banker (or, for that matter, the blue-blooded engineer as we do the “rags to riches” investment banker). There’s a pretty deep lack of recognition that wealth plays an important socioeconomic role.

There is a lot to be said about progressive taxation. And there’s reason to believe in certain circumstances a wealth tax is preferable given behavioral idiosyncrasies with respect to the discount rate. To the extent we pride ourselves as the nation of immigrants or – more importantly – the “American Dream” it’s important we consider this dimension of the conversation.

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