The former chair of the US Federal Reserve, Ben Bernanke, once quipped that quantitative easing works in practice, but not in theory.
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It's more than you can say about wealth taxes. Wealth taxes struggle in both theory and in practice.
Wealth taxes struggle in theory for at least three reasons.
First, wealth is notoriously hard to measure. The value of someone's equity or bond holdings might be straightforward (despite changing every few seconds), but how do you measure the value of a small business so you can tax it? Even property can be tricky.
The second problem is that, even if we can measure the value of wealth, we would be taxing unrealised gains.
The above small business owner would need to come up with big sums of money, forcing them to liquidate part of the business, take out big debts, or liquidate other assets.
The third problem is that wealth is highly fungible: it can be shifted easily. Your response to the above might be "well, let's create exemptions for the hard-to-measure things". Great! The result is that everyone will stash their wealth in the things that don't attract the tax.
The result will be the worst of both worlds: you won't raise much money, but you will create a whole bunch of distortions that hurt investment, savings, growth and jobs in the economy.
And it gets worse. Suppose you do somehow manage to measure wealth accurately and manage to tax all forms of wealth in Australia, what happens next? The most likely answer is: people will move their money out of Australia.
The biggest winner from a wealth tax could well be the foreign countries who get all our capital.
Whatever your ideas are for the above problems (new capital controls to stop money leaving the country, armed police searching bags at the airport for gold and cash, the criminalisation of Bitcoin and digital assets), they all involve the same thing: big, complex new distortions.
This brings us to the practical problems of wealth taxes.
Although wealth taxes might seem new and interesting to Australia, they are not even remotely new when we look overseas.
Believe it or not, the majority of OECD countries in 1990 had wealth taxes. Thirty years later, there are only four left (France, Norway, Spain and Switzerland).
Why did all these countries drop wealth taxes like a hot potato? It's because they didn't work.
An analysis by the OECD looking across all of the instances in which wealth taxes were implemented concluded that "the revenues from wealth taxes have typically been very low".
Worse still, not only was revenue very low, revenue remained constant even when wealth in those countries increased considerably.
Why did this happen? Turns out, the theoretical concerns outlined above played out exactly as we would expect in practice.
The OECD concluded that wealth taxes produced substantial inefficiencies because authorities couldn't measure wealth properly and couldn't apply the taxes consistently across assets.
Related to this, they found that wealth taxes resulted in substantial capital flight: people either shifted wealth into the areas that weren't subject to the tax or they shifted the wealth into other countries.
This made wealth taxes very easy to repeal - they were complex, they killed incentives to save and invest, and they raised very little revenue.
Problem solved? Hardly.
There are lots of people who are passionate advocates of wealth taxes.
But without wanting to sound patronising, those people aren't actually passionate about wealth taxes at all.
What those people are passionate about is reducing inequality and raising more government revenue to fund the things they care about.
This is a much better place to start the conversation. Rather than asking: "do you think wealth taxes are a good idea?" we should be asking "what is the best way to reduce inequality while raising more revenue to fund public goods?".
This question is much better at bringing people together. It's also much easier to answer.
The Institute for Fiscal Studies did a major study into wealth taxes across the world and reached this simple conclusion: "a wealth tax is a poor substitute for properly taxing the sources and uses of wealth".
In a nutshell, this is what we need to be doing in Australia.
READ MORE ADAM TRIGGS:
The tax rates rich people pay on their income ranges from 47 per cent on wages, down to 0 per cent on inheritances - they even get negative tax rates for some investment properties and franking credit cash refunds. This inconsistency is crazy.
The tax rates rich people pay on their spending is similarly all over the shop: it's high if they buy a luxury car and somewhere between 0 and 10 per cent for everything else.
There is no consistency, and trusts, superannuation and corporate structures allow them to shift their income to get the best rate.
Every study undertaken on tax in Australia and in other OECD countries reaches the same conclusion: you will raise substantially more money and reduce inequality more effectively by cleaning up this mess than you will from introducing complex new wealth taxes.
The problem in getting tax reform isn't economics. It's politics. Tax reform is a political nightmare, but we know one thing for sure: making the economics unnecessarily more complicated won't help.
- Adam Triggs is a partner at the economics advisory firm, Mandala, and a visiting fellow at the ANU Crawford School and a non-resident fellow at the Brookings Institution.
