There was a flurry of recent discussion around the Biden-Harris proposal to tax unrealized capital gains, probably best summarized by this “special edition” of the (always excellent) “Best of Econtwitter” substack.
Note that, because capital markets are global, we should not expect a strong correlation between personal taxes on capital and GDP per capita, growth rates, or investment. Corporate income taxes have a stronger effect, because they're levied based on where you invest, whereas personal taxes are levied based on where you live, regardless of where you invest.
Private property is a government service, so one should expect to pay more if one owns more. Wealth taxes have always been problematic, so the usual approach was to tax income generated by that wealth and the gains when realized. This worked moderately well. We saw a boom in growth and innovation back when marginal income tax rates were up around 90%. The modern way of incrementally liquidating companies didn't work at those tax rates, but disinvestment makes perfect sense with modern rates.
Unfortunately, the general growth in liquidity makes it possible to spend unrealized gains all too easily, so the income-wealth correlation doesn't work as it once did. With low interest rates, borrowing against unrealized gains is cheaper than paying capital gains taxes, and with the government pumping money to the wealthy and guaranteeing market performance as it has for the last four or so decades, it's a safe game to play.
Most of what is considered capital these days has nothing to do with investment in the production of goods and services. It's all casino chips. I would like to encourage capital formation in the traditional sense, but current policies don't really work. Real capital formation is much more dependent on government efforts than anything in the private financial sector as we've seen with SpaceX, Tesla, Apple and Google. I doubt that taxing "capital" would have as much of a negative economic impact as traditional theory suggests.
Note that, because capital markets are global, we should not expect a strong correlation between personal taxes on capital and GDP per capita, growth rates, or investment. Corporate income taxes have a stronger effect, because they're levied based on where you invest, whereas personal taxes are levied based on where you live, regardless of where you invest.
Private property is a government service, so one should expect to pay more if one owns more. Wealth taxes have always been problematic, so the usual approach was to tax income generated by that wealth and the gains when realized. This worked moderately well. We saw a boom in growth and innovation back when marginal income tax rates were up around 90%. The modern way of incrementally liquidating companies didn't work at those tax rates, but disinvestment makes perfect sense with modern rates.
Unfortunately, the general growth in liquidity makes it possible to spend unrealized gains all too easily, so the income-wealth correlation doesn't work as it once did. With low interest rates, borrowing against unrealized gains is cheaper than paying capital gains taxes, and with the government pumping money to the wealthy and guaranteeing market performance as it has for the last four or so decades, it's a safe game to play.
Most of what is considered capital these days has nothing to do with investment in the production of goods and services. It's all casino chips. I would like to encourage capital formation in the traditional sense, but current policies don't really work. Real capital formation is much more dependent on government efforts than anything in the private financial sector as we've seen with SpaceX, Tesla, Apple and Google. I doubt that taxing "capital" would have as much of a negative economic impact as traditional theory suggests.