Income vs. Wealth

While we're on the subject of rich and poor, another issue comes to mind: income versus wealth.

Conservatives often decry the progressive income tax on the grounds that it does not put a higher burden on the wealthy, necessarily, but rather on those that currently have a high income. The latter may be people who are still a long way from being wealthy. For example, it could be a doctor who is paying off hundred thousand dollar loans she took out to pay for medical school. This doctor is clearly not wealthy.

In a world where the tax man had perfect information, would it really make sense, though, to be taxing based on wealth rather than income? I would argue not. Why should someone with a modest income who has managed to save up a significant amount of money over time be taxed at a higher rate than someone who has a higher income but spends it all as fast as it comes in? That would clearly be rewarding the wrong behavior.

The example of a doctor paying off loans seems bad because it is a case of investment: in this case, the doctor is investing her money in educating herself so she can earn a higher income in the future. Typically, we only tax the profits of investment, not the revenues. Perhaps the tax code could be fixed to better handle those cases. However, they are often sorted out already in the form of deductions. Special provisions for paying off school loans are usually popular with politicians. Other investment cases are likely similar.

If we have deductions for investment cases and we don't want to reward people for not saving money, then what's wrong with taxing income instead of wealth?