Inspired by this analysis at MarketWatch from Greg Leiserson on the implications of a wealth tax in the United States, I thought I would make a few remarks.
First, as I noted previously, any notion that a wealth tax would only fall on the top .1% of those who hold wealth is whistling past a graveyard. If such a tax were constitutional and were enacted, it would quickly be extended to the top 1% (40% of wealth) and then to the top 5% (65% of wealth).
Second, we already have a wealth tax in the United States at the state and local level. It’s called the “property tax”. In most states and localities of which I’m aware it is regressive and unfair.
Third, although there would be a serious political battle over whether to impose such a tax the real donnybrook would be over what would be included as wealth and how its value would be determined.
Consider the implications. Should the primary residence be included as taxable wealth for the purposes of the tax? How about pensions? If you think the screams about limiting the deductibility of taxes paid to other jurisdictions were bitter, wait until you hear the complaints about those.
If we’re going to have a wealth tax, levy it as a head tax, based on wealth weighted zip codes of all known address’s, each address assessed and added to total tax.
Make it stiff and give the IRS the tools it needs to enforce it. We take property from people engaged in the drug trade without a trial or hearing. We can do the same for Capitalist Bosses and profiteers.
It doesn’t matter whether we have it or not, or whether we try to un-subsidize the wealthy or not. We have a 250 year record of the rich getting around every conceivable attempt at limiting their social harms. This system cannot be definitively fixed by anything government does, ever.
Actually, we can’t. No ex post facto laws.
And for purposes of historical context, Warren’s proposals, including the tax, are right out of classical liberal theory.
BTW, in support of Ben’s claim here’s a portion of a letter from Jefferson to Monroe in 1785:
My objection to such a plan is that under our present government funds extracted from the wealthy will just be transferred to a different group of the wealthy.
” If such a tax were constitutional and were enacted, it would quickly be extended to the top 1% (40% of wealth) and then to the top 5% (65% of wealth).”
That never happened with the inheritance tax. Why would it necessarily happen with this tax?
I dont see this happening anyway. AS we discussed recently the wealthy will just use their influence to keep this from happening. That top 0.1% now control so much money that it is easy for them to buy people off, remembering that this does not have to mean a lot of cash payouts. Just make sure Senators X’s loser kids get great jobs.
Steve
It’s exactly what happened with the income tax. It started with just the top fraction of a percent and quickly expanded.
What makes you think that? The inheritance tax began 220 years ago as a stamp tax on bequests and expanded through time. That it was decreased fairly recently? The reality is that very few taxes that are supposed to apply only to the very rich stay that way.
Among the reasons I think that a wealth tax would be expanded rapidly is that it would be so inefficient. The same motivations that impelled it to be enacted in the first place would cause it to be expanded despite it being unable to achieve its objective.
Over time taxes always go up even by creeping down the income/wealth scale.
But the practicalities are overwhelming. Is the PV of the income stream from SS wealth? Pensions?
How about other deferred compensation?
How does one value a business? Securities? And what about changes in those values, especially large ones? Do houses count? Cars? How about your grandfathers baseball card collection.
How long until the SJWs want to impute wealth to past grievances, education or skills?
It boggles the mind. I’ve mentioned this before. Norway instituted a wealth tax. One of the early deals I did in my career resulted from Norwegians selling off business assets to avoid the issue. There went Norwegian jobs. And I’m sure none of the sale proceeds found their way into Swiss bank accounts. (Snicker).
Let’s face it. This proposal isn’t driven by a sense of equity. And not income inequality. Better proposals are available. It’s driven by politicians insatiable need to tax and spend. Wait until Hollywood types discover their Malibu and Aspen mansions have to go on the block. Latent conversion to Republicans waiting to be had…..
“Hollywood types discover their Malibu and Aspen mansions have to go on the block. ”
The thought fills me with delicious anticipation. I hope CNN covers the evictions live. Welcome home, headliners.
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To me, the main problems with a wealth tax are what Dave describes here – the practicalities. This is another proposal that sounds great until you start considering implementation and the details. The more room for subjectivity, rules to clarify, etc., the more carve-outs there will be, the more complex and inefficient and unfair the whole process becomes.
But more than that it is still just a band-aid. Inequality is not increasing because of tax policy and tax policy cannot fix it.
Looking at the article; 40% of household assets are pensions / retirement accounts or real estate.
If you exclude those – you lose half the potential tax base.
Yes, the problem is the innovation of compound interest. Assets that accrue it grow much faster than the economy can, and the rentier acquires a greater and greater share. Taxes in theory can address this as can usury laws and debt forgiveness, but in society after society the rich use their influence to repeal or weaken the rules.
The Romans had the same problem. Julius Caesar came to the fore by championing the average Roman citizen enduring their loss of land, incomes and personal freedom to the large land-owning families.
It is emotionally understandable, Gray, but now you are engaged not in tax or public policy, but vindictive mob rule. When the dust settles on changes to the Code I don’t like your chances.
People who have not been exposed to valuation issues in more than a hypothetical sense have no clue the Pandora’s box that would be opened. The complexities would be a feast for accounting, tax and valuation practices. The lawyers would have work in perpetuity, and the politicians would need wheelbarrows to carry all the donation cash thrown at them to tinker with the Code. We had a fire at a portfolio company. I’ll bet we have 50 hours into tax lawyers and tax accountants trying to sort out the tax issues of “involuntary conversion and insurance recovery.†And they still don’t have a crisp answer.
Meanwhile, we have people bemoaning compound interest and playing with their Roman toy soldier sets but not dealing with straightforward immigration and trade issues, which might actually improve the income prospects of low to moderate wage earners. It’s like global warming, Rube Goldberg solutions but never the dreaded nuclear power………….which runs France.
But come to think of it, what the hell, who cares about taxes? I recently learned from a particularly insightful politician that we all only have 12 years anyway…….. Dont worry, be happy.
In any game, especially the game of life, every player needs to have something to gain, and lose, or the temptation to just tip over the board grows strong. Of course I don’t mean it, should’ve saved that comment for some other blog.
Ben,
Considering what interest rates have been over the last few decades, I don’t think compounding is much of a factor. For plebes like me, the interest I can get doesn’t even cover inflation.
A bigger problem are things like the Romney IRA loophole.
“What makes you think that? ”
Because it never did extend down to the top 5% as you predicted. It always affected relatively few people. But as I said, it won’t happen. We have have never had the combination of so much wealth controlled by this kind of minority coupled with their ability to control policy in the US. It will be too difficult, or maybe unfair or something. The think tanks are already at work to make sure it doesn’t succeed. My prediction is that 10 years from now the top 0.1% will control an even larger share of our wealth, and just like the last 30 years, there won’t be any improvements for anyone else. Trickle down is just trickled on.
Steve
The income tax certainly has. At first it only pertained to the top .1%. Most Americans didn’t even file. Now it’s a lot more than that.
And inheritance tax MOST CERTAINLY did extend below the top 5%. Again, where are you getting your information? It’s just wrong. Tax stamps had to be purchased for all bequests. If you were a farmer and left your kid a cow, a 25 cent federal inheritance stamp was supposed to be purchased for the bequest. Non-compliance was the only way it didn’t extend to all wealth levels. The movement to limit the inheritance tax began in 1976 and there has been a concerted effort to further restrict it ever since. That’s no counter-argument to my prediction.
The tax stamp existed for about 5 years.
Steve
Steve,
The cost for progressive programs is massive. I find it hard to believe they would stop at $40m when there is so much “need” and so much more to be had.
It’s largely academic though as it’s probably unconstitutional and likely wouldn’t be popular enough to overcome that burden.