In another edition of "russell asks," he queries why we can't/don't tax wealth rather than income.
There are a number of reasons for this, some better than others. Let's assume the federal government set a wealth tax at 2%.
First question is: 2% of what. Presumably of the fair market value of your net, but not gross, assets (that is, less any debt outstanding, but it wouldn't have to be that way).
That leads to the second question: how do we measure fair market value? In cases like publicly traded securities, it's easy: the closing price on 12/31/2013. But for other assets, it's much more difficult. Certainly houses are more difficult than stock - and we do impose a wealth tax on houses at the state level but it's called a "property tax" (and at the gross value of the house no less) - but probably doable. But what about my car(s) (although some states base registration fees on FMV)? Or my boat? Or my persian rugs? Etc.
We could of course make simplifying assumptions, e.g., all 2003 Honda Civics are valued at $X - that seems a little unfair to the person who has 200,000 miles on it vs. someone who only has 10,000. Or we could tax only easily measured assets like publicly traded securities (we'd have to decide what "publicly traded" means, and there's at least one, if not more than one, very long definition of that in the Code) and "large" assets like houses - perhaps piggy backing off the state's valuation for property tax purposes (and maybe subtracting out the outstanding principal of the mortgage). But this would allow folks with very nice cars, yachts, Picasso collections, etc., off the hook.
To compensate for this we might try to make it progressive by saying 2% of assets above $Y, but that wouldn't eliminate the need to measure your assets. OTOH, we kind of do this now with the estate tax, but that's one time only event, not yearly. If $Y was set high enough, perhaps yearly measurement wouldn't be an issue.
Another question, although a similar problem arises with the income tax, is why measure on 12/31 each year? Why not more often, or less often? And what happens if there is, e.g., a huge run up in the stock market in December followed by a collapse in January (say the financial crisis hit January 15), and now my stock is worth $50 but valued at $100 for the 2% tax?
Ability to pay might be an issue as well, which is generally why there is income tax withholding on wages (and certain other payments). Suppose I'm retired, living in the house I paid off over 40 years, living on social security, and the neighborhood is much nicer now than when I moved in. Now there's a 2% tax on my house, that could be a large chunk of my income, and I might either have to sell my home, take out a loan, or perhaps a reverse mortgage.
Other issues: what to do about pensions, 401k, IRAs, etc.? Is there a separate wealth tax for corporations, trusts and other legal entities? Are charities exempt? How do we value intangible property? Do we keep the current "worldwide" system of taxation in place? Would this cause wealthy people to renounce their citizenship?
There may also be a Constitutional problem, which is whether a wealth tax is a "direct tax" that must be apportioned among the several states. I don't think the Supreme Court has ruled something a direct tax in more than 100 years because the apportionment clause is, well, stupid and nonsensical. (see this article), but I can see the current court ruling that such a tax is "direct."
It might be easier to tax wealth now than 100 years ago, but it's not as easy as taxing income, or at least we have much more experience taxing the latter and the infrastructure in place to do so. That said, until recently many countries in Europe had a wealth tax (and probably some still do), so maybe we could learn from them.
Finally, there is the Golden Rule: he who has the gold, makes the rules. Which might be the best and simplest explanation.