Thomas Picketty's Capital in the 21st Century has been in the online conversation mix as of late; the French economist is positing a wealth tax to address an overemphasis on capital creation. Here's a friendly summary from thoughtful liberal Matt Yglacias.
There are a number of things somewhat flawed in Piketty take, but for me, the idea of a wealth tax per se isn't a deal-breaker. We have to raise taxes somehow and there are limited amount of marketed "sins" to apply sin taxes to. Thus, we're left to do things like tax sales or income or property for things that don't lend themselves to be financed by user fees.
Government should spend money where it does the most good and tax where it does the least harm. If the taxes do more harm than the spending does good, we need to scale the spending back, but on the flip side, if a government project does more good than the taxes needed to raise the funds do harm, it would seem to make sense from a commonweal perspective.
Would a tax on wealth be in that do-least-harm bucket?
The first thing I wanted to tackle was Piketty's focus on the wealth-to-income ratio. It is higher than Piketty would like, having been smaller in the middle of the 20th century and high both before WWI and today.
Two areas might lead to that. The first bucket can be labeled production capital.
The increased use of automation in the post-WWII era has made industry more capital-intensive. On the farm, big tractors and combines replace manual labor, adding to the capital needed and subtracting the income from labor. Containerized shipping replaces a pack of longshoremen moving boxes from ships on to trains and trucks and instead has a crane operator moving semi-trailer sized containers off the ships and on to trucks and trains directly, thus adding to capital and reducing wage income in shipping.
Secondly, we have more material goods than in days of yore; let's call that bucket leisure capital.
I remember seeing an add for jet-ski type watercraft, with a family of five coming onto the surf off of their watertoys. At about $5000 a pop, the family had at least $25,000 tied up in those toys if they weren't actors playing an active and affluent family.
Those "durable goods" that don't get used up right away will add to wealth, broadly defined. Fancier houses, cars that all but drive themselves (Google is working on eliminating the "all but", so I've read) and all kinds of electronica wind up adding to the amount of stuff we have rather that stuff we consume.
Would we be better off with less leisure capital? To decrease it would require either taxing leisure capital (property taxes do that on some of the stuff already) or subsidizing services and consumable goods rather than durable goods.
Would we be better off with less production capital? We would wind up making things more labor intensive with less production capital, but would likely stifle innovation in a number of tech industries that are capital-intensive.
In order to reduce the wealth-to-income ratio, we either have to increase income or decrease wealth. Increasing income on a macro level is easier said than done. Decreasing wealth would seem foolish, since we're better off with more stuff than less stuff, but the cry of the do-gooder utilitarian would like to see more GDP devoted to consumption by the least of these and less devoted to the acquisition of leisure capital.
An increasing wealth-to-income ratio would indicate that we're making more than we consume and save the difference, assuming that we're in a normal economic setting where the economy is growing, incomes are rising and some of that income is saved in some fashion, either as an investment or put into durable goods and houses. That seems more a feature than a bug to me.