Reviews | The need for a capital income tax

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The rate of capital accumulation has negative effects on the welfare of society.


Since the 1980s, income inequality has become a major problem in the United States, largely because there is no way to tax the capital goods of those earning $400,000 and above.

Income inequality would not be serious if social welfare for all improved.

However, the United States does not provide our poorest Americans with the basic goods and services they need to survive. Low-income Americans are unable to lead profitable lives, while those in the top income quintile get everything they want and pass it on to their children.

It is time to introduce a progressive tax on capital income because it will reduce income inequality and better finance the American welfare state.

In an economic sense, wealth and capital can be used interchangeably. Capital refers to assets used by businesses and government agencies to earn profits. This definition encompasses two types of capital.

The first type is real estate, such as the house your parents own and other forms of real estate.

The second type of capital is made up of factories, infrastructure, machinery and patents, called financial and professional capital.

Generally speaking, the richer a person is, the more likely they are to own more capital. Thus, most middle-class Americans own some form of capital through their homes and retirement accounts. University students, on the other hand, are likely to have little or no capital.

Traditionally, economists have argued against the taxation of capital income because of the way it distorts household consumption and savings.

According to the theory, under a capital income tax, households and businesses would be penalized for selling their capital assets.

Consequently, households would be more inclined to over-consume in the present and not to invest in the future capital stock. As a result, it would hurt technological innovation, the main driver of long-term economic growth.

Thus, the optimal tax on capital income would be zero because these taxes end up doing more harm than good to economic well-being.

However, the theory that capital income drives economic growth is not necessarily true in the real world, given the preferences of capital holders when it comes to spending the income they earn. they draw capital.

Instead of focusing on spending their profits to find the next Moderna or Tesla, many capital owners are more interested in spending the capital on other things such as leisure pursuits or transferring it to future generations through legacy.

In short, much of the profit from capital income is not actually used to promote long-term economic growth. On the contrary, it could harm economic growth.

Globally, the current rate of capital accumulation far exceeds the rate of economic growth with a pronounced trend in the United States. This means that there is a relationship showing a lot of profits from capital that are not used in an economically beneficial way.

The solution to this problem is simple: tax excess capital income and redistribute it to those who need it most so they can live better and happier lives.


The columns reflect the opinions of the authors and are not necessarily those of the Editorial Board, The Daily Iowan, or other organizations with which the author may be involved.


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