Wealth, inheritance, business: What should be taxed?

What you choose to tax affects the economy just as much as who you tax and by how much. Governments have been known to get creative—Russia used to have a tax on beards, and some US states have one on tethered hot air balloons.¹² Some are personal, taxing our purchases, property, and income, and others are business-focused, taxing corporate profits or value added by firms. Rising asset values, inheritance, or international trade might also be taxed.

Each kind of taxation will affect some people more than others, and some governments might choose to customise tax so people pay different amounts according to things like age, number of years worked, and income. Taxes that take a set amount from people’s income, no matter how high it is, is called regressive taxation; taxes that require a higher percentage of someone’s income as that income goes up are called progressive taxation.

This language applies even if it’s not income tax we’re talking about—so sales tax, for example, is regressive, because it’s the same no matter what your income. That means proportionally, high-income people pay less sales tax than low-income people relative to what they earn, because they spend a lower proportion of their incomes on consumer goods.³

It’s important to consider that income isn’t the only form of wealth, and that a lot of the wealthiest people earn their money from things like interest payments, dividends, and gains from capital, which are taxed very differently. So even if income tax is progressive, overall their burden might be much lower than that of the poorest, because most of their wealth is coming from a whole host of different sources.