should we be taxing earnings...or should we be taxing wealth?

[Xithras]

40. Wealth isn't cash. Few wealthy people keep their money liquid. It wouldn't work.

And liquidating that amount of property (land, art, cars, private jets, skyscrapers, etc) each year would utterly destroy the American economy. The massive and continuing influx of that much land onto the market would make our last real estate crash look like a day at the park. Land values would crash through the floor, completely destroying housing prices nationwide and doing massive damage to the American economy.

Not to mention the fact that the most likely BUYERS in that scenario would be overseas investors. After all, who are the wealthy going to sell their wealth to for cash? The other American wealthy? Nope, they have to pay the tax man too. So it will be bought by the Chinese, and the Japanese, and the Russian's, and the Oil Sheiks in the Middle East, and anyone else who has the cash to buy property at the Great American Fire Sale. It won't take long at all for them to buy up most of the good stuff.

And then you get into the fact that, unlike income, the value of wealth itself fluctuates wildly. If you own 5000 shares of a company worth $1000 a share, you own $5 million worth of stock, and have to pay taxes on $5 million in wealth, right? So what happens when every American investor puts 15% of those shares up for sale on the same day? Price crash. Now it's worth $200 a share. You pay taxes on its new $1,000,000 value ($150,000). Without the pressure to sell after tax day, the value shoots back up again and the investor has just reduced his tax bill by 80%. Congratulations, you've just created a system that encourages the wealthy to keep their wealth in a volatile medium that can be manipulated to reduce their tax load. And they didn't even have to use any loopholes.

But at least they have that. What If I own 7 acres of land in Napa, worth a million dollars an acre? To pay my tax bill, I'd have to sell off an acre of land. Problem is, every other ag land owner in the Valley is also doing the same thing. Why are they going to pay me a million bucks if the guy next door will sell it for $750,000? And the guy next door to him for $500,000? Much American wealth is tied up in land value, and land value is driven almost exclusively by scarcity. By forcing annual sales, you eliminate the scarcity and permanently devalue the very wealth you're trying to tax. Devaluing means less tax $$, hyperinflation, and government austerity.

We don't tax wealth because there is no effective way to do it without causing massive economic harm.