Coase-Sandor Working Paper Series in Law and Economics

Taxing Wealth in an Uncertain World

Daniel Hemel


An annual wealth tax, a mark-to-market income tax, and a retrospective capital gains tax are three approaches to capital taxation that yield roughly equivalent outcomes under certain conditions. The three approaches differ starkly, however, in their exposure to uncertainty of various types. This essay seeks to highlight the effect of uncertainty on the implementation and operation of alternative capital taxation regimes. An annual wealth tax is highly vulnerable to valuation uncertainty and constitutional uncertainty, but less so to political uncertainty. A retrospective capital gains tax, by contrast, minimizes valuation uncertainty and effectively eliminates constitutional uncertainty but remains highly exposed to political uncertainty. A mark-to-market regime falls somewhere between the two extremes on dimensions of political and constitutional uncertainty but shares in a wealth tax’s exposure to valuation uncertainty. Ultimately, the choice among alternative capital taxation regimes reflects a tradeoff among uncertainties of different varieties.