Top 5 Points For and Against A Wealth Tax In Place Of An Income Tax
By: Jesse Bloom
Tags: Money, Politics, Taxes, Finance, Economics

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.

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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. 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. 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. 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. 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.

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