Top 5 Points For and Against A Wealth Tax In Place Of An Income Tax

Elizabeth Warren has proposed a limited wealth tax

What is a wealth tax?

Whereas an income tax is a tax on a household’s revenue (salary), and our corporate tax is a tax on a corporation’s profit (revenue less expenses), a wealth tax is a tax on a household’s assets (what it owns) less liabilities (what it owes to others). In theory, a 3.65% tax on household wealth would fully replace the $3.5 trillion generated from the federal income tax in 2019.

For:

1. A wealth tax is far more fair than an income tax. Income taxes were first levied in the U.S. during the Civil War, and the argument was made that it was only fair to levy a tax on households commensurate with their abilities to pay. The idea was fathered by Adam Smith, himself. Income was chosen as the measure, but net worth is a far more accurate measure. Consider two men of equal pay, otherwise identical except one must support a large family; equal incomes, unequal abilities to pay. Consider two women of equal pay, otherwise identical except one holds overwhelming student debt; equal incomes, unequal abilities to pay. Consider uninsured victims of robberies and house fires; equal incomes, unequal abilities to pay. Consider a retired billionaire and an elderly grocery store clerk; the elderly clerk will pay more in income tax than the billionaire. Income does not tell the whole story, and is not always representative of one’s ability to pay.
2. A wealth tax will reduce wealth inequality, improving the quality of education and health care while reducing crime and political instability. Economists believe that some economic inequality is good for an innovative economy, but too much of a good thing can be a very bad thing. The level of wealth inequality in America is out of control. Three men own more than the bottom 50% of Americans. The top 0.1% of Americans own more than the bottom 80%. Racial comparisons are more dire, for example, the median net worth of a white family is $188,200, compared to only $24,100 for a black family. Extreme levels of wealth inequality like those seen in America have been shown to suppress country-wide education and health, breeding crime and political polarization. Wealth inequality is America’s chronic illness, and nearly all of the systemic problems we experience are merely symptoms. Treating this illness might be the single most important thing we could do to fix America.
3. A wealth tax can increase economic growth. Further from the previous point, improving education and healthcare while reducing crime and polarization have clear economic advantages, but what are the more direct economic impacts of wealth redistribution? An IMF report discusses recent literature and concludes that a Gini coefficient (measure of wealth inequality) above 27 is where inequality “begins to hurt economic development.” Unfortunately, the U.S. Gini index clocks in at 41.1.
4. Local governments already impose a type of wealth tax in the form of property tax, so the idea is not as foreign as many believe. While a sweeping wealth tax would be more complex than just a property tax, we would not be starting from scratch. There would be many headaches in valuing household net worth, considering the immense wealth buried in illiquid and difficult to value assets like art and private businesses. The IRS would have to develop valuation methods for each type of item, thresholds for what can be excluded, and new resources to audit household filings, but it’s entirely within the realm of reality. We already have processes to value real estate, private insurance providers have created tools to value assets like autos, jewelry and art, and financial institutions can report balances of assets and liabilities directly to the IRS similarly to how employers report income today. Assets that are expected to have little to no resale value can be ignored and large purchases can be reported directly to the IRS as an audit resource. Proposals have solved the cash availability concern by allowing households to defer payment with interest for a few years if there is a qualifying shortage of cash. There will always be a level of fraud, but that’s a different show. The point is, we can do this.
5. Asking Americans to estimate their net worth each year may dramatically improve financial responsibility and planning. As a former wealth advisor, the first bit of homework I gave my clients was to calculate net worth. I was astonished with how many families had no real idea of the value of what they owned and owed. How can you plan for the future if you don’t know what you have now? I understand that most folks live their lives day-to-day, and hope they have some money left over, but it would be an absolute good for everyone to sit down once a year and determine their financial health. Wouldn’t it be helpful to know the IRS-estimated resale value of your major assets, or the market value of your small business? When it comes to your family’s finances, ignorance is not bliss, it’s dangerous.

Against:

1. A wealth tax may be too complicated to accurately audit. A wealth tax may be more fair than an income tax, but it is simply too complicated to efficiently operate. Wealth is such an intimidating number to estimate, especially for the wealthy, who have large swaths of wealth tied up in private businesses both foreign and domestic. How much is your pension worth? How much is your healthcare worth? How much is your patent or unfinished art piece worth? How much are your claims to Social Security worth? How much value do you ascribe to the trees on your property, which you could theoretically chop up and sell? How much is it worth to have rich parents or a scholarship to law school? The wealth tax is a great idea in theory, but it is impractical to implement on our national scale to fully replace the income tax.
2. A wealth tax may incentivize the wealthiest households to move person or property offshore. Fraud is constant everywhere, but there is precedent that a wealth tax may invite enough fraud to make the entire process untenable. France tried to implement a 1.5% wealth tax on assets above $1.5 million, but it resulted in 70,000 millionaires leaving the country. It was hurting the country’s economy enough that Emmanuel Macron scrapped the tax three years ago. French economist, Eric Pichet, noted that France’s attempt at a wealth tax “caused a net revenue loss” because so many wealthy fled the country and moved assets offshore. Adding a new tax actually lost money for France. While it is harder to expatriate in the U.S. than in France, it shows how nimble the wealthy are in avoiding these types of taxes. Investments will be made overseas instead of in America, and hiding assets offshore will be a given.
3. A federal wealth tax may be unconstitutional. While local governments are not governed by this law, the Constitution states, and the Supreme Court has upheld, that a wealth tax would have to be apportioned by state population to be constitutional. Don’t ask me why, but it’s known as the Pollock decision. As one can imagine, that would effectively kill the wealth tax.
4. Wealth taxes have been attempted in other countries and have in nearly all cases been repealed. 9 countries in Europe repealed their wealth taxes in the last 30 years. In Austria, Finland, and the Netherlands, it was too costly for the governments to estimate household net worth, and it wasn’t worth the hassle. In Germany, wealth taxes were declared unconstitutional. Sweden repealed its wealth tax because distortions in government asset valuations severely disrupted private investment. The few countries that still have wealth taxes bring in a tiny fraction of their income from them, and wealth valuation is based on an honor system. If the wealth tax is such a good idea, why have the global leaders in progressive governance mostly given up on it?
5. A wealth tax may reward overspending and overborrowing while punishing saving. Consider a recent graduate from medical school with overwhelming student debt, who has a little bit of discretionary income for the first time. That new doctor can take that extra cash and begin paying down her debt or she can spend that cash on a vacation. In an income tax system, the new doctor is more incentivized to pay down the loan because there is no tax break for holding debt. In a wealth tax system, the new doctor is incentivized to go on the vacation, because paying down her debt increases her net worth, on her way to paying taxes. Consider a middle-class father deciding how much to save for his child’s education. If the father decides to save more, accumulating wealth, he will be taxed, but if he spends the money on fancy meals and cigars, he will remain untaxed. A healthy economy cannot persist while rewarding overborrowing and overspending while punishing the accumulation of wealth.