Wealth, like virtue, is its own reward. This notion underlies our transfer tax system. Notwithstanding, discussions of income tax policy frequently view wealth as just deferred future consumption rather than as an end of itself. Professor Louis Kaplow, in Utility from Accumulation, reminds us that the benefits from having wealth in addition to providing financing for future consumption should be taken into account in all tax analyses and that, if so, very different conclusions on a number of issues can be reached.
The importance of Professor Kaplow’s point cannot be overemphasized. If wealth is just deferred future consumption, taxing the income from wealth — from savings, from capital — distorts the decision of whether to consume now or in the future. The resulting incentive to consume sooner rather than later reduces economic efficiency. An example of tax rules that are consistent with this view is that we now have a very low tax on the return to savings (as a consequence of the low and expansive special rate on capital gains), rather than, as Pre-Reagan, having a lower tax on services (“earned”) income than on the return to wealth. Continue reading "Wealth is Just Capital!"