Question

The concentration of wealth and income inequalities have always been important public policy issues for the US economy, but the intensity of interest in these issues has varied over time. These issues became very prominent in the late 1800’s and early 1900’s, in the 1920’s and 1930’s, in the 1960’s and 1970’s, and at the present time. One of the current policy proposals is to reduce income and wealth inequality with a tax imposed on the assets of the wealthiest members of society. How would a wealth tax affect the potential GDP growth, incentives for capital investments, and equality of income distribution in the US?

Answer 1

Most economist agrees that the wealth tax leads to reduced economic efficiency and reduced economic output which will decrease the economic growth rate. The wealth tax reduces net return and the level of investment, one of the force driving growth of the economy.The wealth tax will affect the risk bearing of investor which is thought to play an important role in determining growth rates. Product and technology development depend on supply of domestic risk capital. Also the wealth tax reduces available capital, which in turn may hamper small firm creation because access to own capital is an important determinant for individuls propensity to start a business.Also the wealth tax would reduce the after-tax return to saving and would leave to lower national saving leads to a decrease in capital stock. In general, a decline in saving reduces the future income of Americans, limits financing for productive investments, and reduces the total output.