Public economics of taxing the wealthy

This chapter considers insights from modern tax policy in general, and taxation of the wealthy and the wealthiest specifically. This involves some discussion of key topics from the public economics of taxation. More precisely, the traditional neoclassical public finance approach examines the equity, efficiency and distributional aspects of broad-based taxation, especially taxes on income and consumption. For various reasons, this broad-based ‘optimal taxation’ approach fails to adequately focus on the equity implications of taxes, especially taxes on capital, that are most applicable to the wealthy in general, and the wealthiest even more so. The discussion considers how the Haig_Simons definition of income relates to the analytical rationale for a progressive income tax. Recognizing that studies on the merits of taxing specific components of wealth rather than wage income or consumption have a history that predates the introduction of the modern income tax, the long and ongoing debate over capital income taxes is examined in detail. The symbiotic relationship between the organization of a capitalist economy and the use of the realization principle to tax capital income is identified and discussed.