taxes-wealthy

There are other tools that don’t involve quite the risks and challenges of targeting the richest families.

When the United States government wants to raise money from individuals, its mode of choice, for more than a century, has been to tax what people earn — the income they receive from work or investments.

But what if instead the government taxed the wealth you had accumulated?

That is the idea behind a policy Senator Elizabeth Warren has embraced in her presidential campaign. It represents a more substantial rethinking of the federal government’s approach to taxation than anything a major presidential candidate has proposed in recent memory — a new wealth tax that would have enormous implications for inequality.

It would shift more of the burden of paying for government toward the families that have accumulated fortunes in the hundreds of millions or billions of dollars. And over time, such a tax would make it less likely that such fortunes develop.

It would create big new challenges for the I.R.S. in ensuring compliance. There is a reason many European countries that once had a wealth tax have abandoned it in the last couple of decades.

And that’s before you get to the legal and political challenges. There is an open debate around whether a wealth tax is constitutional. And some of the most powerful families in the country would certainly deploy their vast resources against a wealth tax, and against any candidate who embraces it.

The comedian Chris Rock had a routine in the early 2000s in which he expounded on the distinction between those who are rich and those who are wealthy.

Shaquille O’Neal, the star basketball player, was rich, Mr. Rock said. The team owner who signed his paycheck was wealthy. And that, in a nutshell, gets at the conceptual difference between trying to tax people’s income, as the tax code does today, versus their wealth.

The C.E.O. of Walmart makes about $22 million a year. He is rich by any definition. But the Walton family, descendants of the company’s founder, are mind-bogglingly wealthy. The Bloomberg Billionaires index estimates that Sam Walton’s three living children are worth around $45 billion each, putting them each among the 20 wealthiest people in the world.

A family that has accumulated enormous wealth can escape with surprisingly low income levels, and therefore tax burdens.

In an extreme example, Warren Buffett owns enough stock in Berkshire Hathaway to put his estimated net worth at $84 billion, but he pays himself $100,000 a year to be its chief executive. Even in years when his wealth rises by billions, he must pay tax only on his comparatively modest income and on the gains from shares that he chooses to sell.

Ms. Warren and other advocates of a wealth tax argue that this accumulation of untaxed or lightly taxed wealth is a bad thing. They say that it enables the creation of democracy-distorting dynasties who accumulate political power, and that tax policy should be used to rein them in more than the current tax code does.

.. A family worth $60 million would owe the federal government $200,000 in wealth tax, over and above what they may owe on income from wages, dividends or interest payments.

If the estimates of his net worth are accurate, Mr. Buffett would owe the I.R.S. about $2.5 billion a year, in addition to income or capital gains taxes. The Waltons would owe about $1.3 billion each.

The tax would therefore chip away at the net worth of the extremely rich, especially if they mainly hold investments with low returns, like bonds, or depreciating assets like yachts.

It would work a little like the property tax that most cities and states impose on real estate, an annual payment tied to the value of assets rather than income. But instead of applying just to homes and land, it would apply to everything: fine art collections, yachts and privately held businesses.

.. What are the arguments against it?

They are both philosophical and practical.

On the philosophical side, you can argue that people who have earned money, and paid appropriate income tax on it, are entitled to the wealth they accumulate.

Moreover, the wealth that individual families accumulate under the current system is arguably likelier to be put to work investing in large-scale projects that make the economy stronger. They can invest in innovative companies, for example, or huge real estate projects, in ways that small investors generally can’t.

It could disincentivize the kinds of moonshot investments that don’t pay steady, predictable returns but can transform society. After all, if wealthy investors are on the hook for a wealth tax every year, they may strongly favor investments that pay a steady, reliable dividend over those that are risky and will take many years to pay off.

Then there are the practical concerns.

Figuring out a person’s total net worth can be a lot of work. Just ask anyone who has had to sort through a large estate after the death of a relative to submit estate taxes.

If the deceased owned financial assets like stock and bonds, it’s pretty easy to check a brokerage statement and surmise the value. But if the estate consisted of a collection of rare antiques — or interests in various real estate or oil and gas projects, or closely held companies — estimating the value is harder.

It can require an army of appraisers and other experts and an often prolonged period of I.R.S. audits and disputes over valuation.

“Presumably, a wealth tax would apply to the same sort of base, except that it would be annual rather than just when a person dies,” said Beth Shapiro Kaufman, an estates lawyer at Caplin & Drysdale.

The very wealthy would have a permanent, continuing need to tally the value of their assets and defend those valuations to the federal government. The Warren plan includes substantial new funding for I.R.S. staff to enforce the law.

And some people may have their wealth tied up in things not easily converted to cash. An early investor in Uber or another company that has achieved a high valuation without going public might have a high enough net worth to owe a wealth tax, but not the easily accessible funds to pay it.

Mr. Zucman argues that people wealthy enough to owe this tax would generally have ample access to credit, and that the law could even be structured to let people pay their tax obligations with illiquid assets.

Gene Sperling, a former National Economic Council director in the Obama and Clinton administrations who now supports a wealth tax, said: “If we were sitting here in 1932 saying we need to create a Social Security system, it would have seemed very complex, but if it’s important enough, you don’t let some complexity become a reason not to push forward.”

Couldn’t rich people just hide their assets overseas?

The wealth tax Ms. Warren proposes would also apply to assets that American citizens own overseas. So in theory, a wealthy American citizen would owe tax on his Panamanian bank account and his Swiss ski chalet.

Ensuring payment would be tricky, which is why the proposal includes all those new I.R.S. employees and stronger international coordination to stop tax avoidance and evasion — as well as an “exit fee” that Americans would need to pay if they sought to renounce their citizenship.

Have other countries tried this? Does it work?

There’s an old line attributed to a 17th-century French politician that the art of taxation is to pluck a goose so as to obtain the largest possible quantity of feathers with a minimum amount of hissing. In the recent past, wealth taxes have failed that test.

In the early 2000s, 10 developed countries had a wealth tax, according to the Organization for Economic Cooperation and Development. That is now down to three: Switzerland, Norway and Spain. France recently changed its wealth tax into a tax only on real estate, more akin to the American property tax.

One problem was that some of the wealth tax plans kicked in at a relatively low level, meaning a vast number of upper-middle-class people faced its nuisance and expense. In Europe, especially, it created incentives for people to relocate.

Mr. Zucman says the United States, as a large country, is better positioned than small countries where wealthy citizens are likely to be highly mobile already. The idea is that Americans will be less likely to renounce their citizenship to avoid paying out a couple of percent of their net worth every year.

Is this even legal?

An income tax is clearly authorized by the 16th Amendment, which states that Congress has the power to “lay and collect taxes on incomes, from whatever source derived.” A wealth tax is more likely to raise constitutional questions, and it’s a near certainty that well-funded opponents would wage a legal battle against it.

(Josh Barro at New York Magazine lays out the legal questions here.)

Is there a simpler way to reduce inequality?

There is. Some tax experts say changes to existing law would accomplish many of the goals of a wealth tax.

One example that Leonard Burman of Syracuse University and the Urban Institute has suggested is to eliminate a provision of current law in which assets that increase in value can go essentially untaxed across generations.

If you start a company and its value appreciates over your lifetime, then it is transferred to a family member upon your death, no capital gains taxes are collected on those decades of appreciation. The family member gets to start over at its current valuation for capital gains purposes.

This “step-up” provision is one of numerous ways that families can accumulate great wealth with minimal taxation. It could be eliminated. Laws could be changed to make it harder to avoid the estate tax, which currently kicks in at about $11 million for an individual and about $23 million for a married couple.

If you want a tax system that leans more aggressively against dynastic wealth and high inequality, there are, in other words, tools that don’t involve quite the risks and challenges of a wealth tax.

But those are a lot harder to capture in a campaign ad, and in the public imagination.

Democrats shouldn’t put themselves in a fiscal straitjacket.

On Thursday, the best House speaker of modern times reclaimed her gavel, replacing one of the worst. It has taken the news media a very long time to appreciate the greatness of Nancy Pelosi, who saved Social Security from privatization, then was instrumental in gaining health insurance for 20 million Americans. And the media are still having a hard time facing up to the phoniness of their darling Paul Ryan, who, by the way, left office with a 12 percent favorable rating.

There’s every reason to expect that Pelosi will once again be highly effective. But some progressive Democrats object to one of her initial moves — and on the economics, and probably the politics, the critics are right.

.. The issue in question is “paygo,” a rule requiring that increases in spending be matched by offsetting tax increases or cuts elsewhere.

You can argue that as a practical matter, the rule won’t matter much if at all. On one side, paygo is the law, whether Democrats put it in their internal rules or not. On the other side, the law can fairly easily be waived, as happened after the G.O.P.’s huge 2017 tax cut was enacted.

But adopting the rule was a signal of Democratic priorities — a statement that the party is deeply concerned about budget deficits and willing to cramp its other goals to address that concern. Is that a signal the party should really be sending?

.. Furthermore, there are things the government should be spending money on even when jobs are plentiful — things like fixing our deteriorating infrastructure and helping children get education, health care and adequate nutrition. Such spending has big long-run payoffs, even in purely monetary terms.

Meanwhile, the federal government can borrow money very cheaply — the interest rate on inflation-protected 10-year bonds is only about 1 percent. These low borrowing costs, in turn, reflect what seems to be a persistent savings glut — that is, the private sector wants to save more than it’s willing to invest, even with very low interest rates.

Given this reality, why not put some of those excess savings to work in high-return public investments? Should we really refuse to spend money repairing sewer systems or providing child nutrition if doing so raises the deficit a bit, with only a minor impact on future interest costs?

But, you may say, isn’t it politically important for Democrats to present themselves as the party of fiscal responsibility? I’m highly skeptical.

Consider budget history over the past generation. The story is very clear: When in power, Democrats make big efforts to balance the budget; when Republicans come in, they promptly blow the money on tax cuts for the wealthy. Yet polling consistently shows the G.O.P. with an edge on the question of which party is better at dealing with deficits.

Or consider what happened after Democrats enacted the Affordable Care Act, going to great lengths to pay for the additional benefits with tax increases and spending cuts. A majority of voters still believed that it increased the deficit. Reality doesn’t seem to matter.

.. Anyway, the truth is that while voters may claim to care about the deficit, hardly any of them really do. For example, does anyone still believe that the Tea Party uprising was a protest against deficits? From the beginning, it was basically about race — about the government spending money to help Those People. And that’s true of a lot of what pretends to be fiscal conservatism.

.. In fact, even the deficit scolds who played such a big role in Beltway discourse during the Obama years seem oddly selective in their concerns about red ink. After all those proclamations that fiscal doom was coming any day now unless we cut spending on Social Security and Medicare, it’s remarkable how muted their response has been to a huge, budget-busting tax cut. It’s almost as if their real goal was shrinking social programs, not limiting national debt.

.. So am I saying that Democrats should completely ignore budget deficits? No; if and when they’re ready to move on things like some form of Medicare for All, the sums will be so large that asking how they’ll be paid for will be crucial.

openpolitics.com

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