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Toward a Progressive Tax Policy

Author: Peter R. Orszag, Adjunct Senior Fellow
June 3, 2014
Bloomberg.com

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In the hoopla over whether Thomas Piketty's data on growing global inequality are correct, an important question about how to address the problem has been obscured. Piketty describes his own global wealth tax idea as more of a "useful utopia" than a practical policy suggestion. Is there anything more plausible that can be done?

Two suggestions come to mind, at least for U.S. policy makers. The first is a progressive consumption tax. This kind of tax is already embraced by many conservative thought leaders because it is, compared with other types of taxes, economically efficient. But it is efficient in no small part because it imposes a tax on wealth. People have no way to convert their money into anything they consume without paying the tax.

As William Gale and Benjamin Harris of the Brookings Institution have pointed out, the efficiency benefits from a consumption tax occur from a combination of effects, including imposing a one-time tax on existing wealth. As they note, this tax on wealth that already been accumulated "is a major component of the efficiency gains because of the creation of a consumption tax." The dirty little secret about consumption taxes is that their putative benefits come largely from Piketty's core idea: a tax on wealth.

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