Recently, I've read a few comments, primarily from very wealthy people, about the proposed wealth tax. I haven't decided whether this is a good idea or not, and so I did some shallow investigation beyond newspaper headlines. Most of us already have a good idea about what tax means, but wealth is not immediately obvious. I've checked several sources on what wealth usually means.
The most common interpretation of wealth I've encountered is that it's equivalent to Net Worth. Basically, Net Worth = assets - liabilities, where assets include the value of all your cash and things you own, and liabilities consist of your obligations and the money you owe.
Hence, if you bought a house for $250,000 and the house is valued at $250,000, then you have a $250,000 asset. If you took out a $200,000 mortgage to finance your purchase of the house, then you also acquired a $200,000 liability. If you also have $5000 in your bank account, then that is an asset. If you bought a car five years ago for $20,000 and paid it off last year, and the current value (Blue Book wholesale price) of that car is now $7000 (because of depreciation, if it were an antique car, it may have appreciated), then you have another asset currently worth $7000. If you buy a second car, a new car, for $18,000 and take out a $17,000 loan to finance it.This give you another $18,000 asset and a $17,000 liability. Suppose this is all of your tangible assets because we don't want to get bogged down with assets like your cell phone or refrigerator or even liabilities like utilities and other taxes.
Then your total assets and liabilities are as follows:
Assets = $250,000 + $5,000 + $7,000 + $18,000
= $280,000
Liabilities = $200,000 + $18,000
= $218,000
And your Wealth is given by
Wealth = Net Worth
= Assets - Liabilities
= $280,000 - $218,000
= $62,000
So suppose that the federal government enacts a 1% wealth tax (which should be called a net worth tax), then
1% of $62,000 = $620.
If this were the proposal, you might want to complain that this unfair, primarily because you don't want to pay another $620 and it is a liability whether you have income to pay it or not. But this it not the current proposal. More on that in a moment. First compare the proposal to property taxes.
If you own a $250,000 house, and two cars with an aggregate value of $25,000 (cars are property in some locales) then you have locally taxable assets of $275,000 without the benefit of reduction by the mortgage liability or financing for the cars. Even if you get a homestead exemption that reduces you asset value for tax purposes by $50,000, you still have $225,000 worth of taxable property. A 1% rate is near the median for all states. Then your straight property tax liability is $2,250, more than three times the amount of the wealth tax on the same properties of $620.
One thing that should be obvious from this comparison, is that the wealth tax rate benefits those who have a lot of liabilities, including those who go deeply into debt, as compared to those who live within their means.
But the currently proposed Wealth Tax is progressive. Like income tax rates, it has brackets. The progressive part means that those in different brackets, pay different rates.
The first bracket rate is 0% for those whose net worth is less than $50,000,000. So if your net worth is $280,000, then pay the exact same wealth tax as someone whose net worth is $50,000,000. That wealth tax is $0.
Those in the next bracket with a net worth of more than $50,000,000 pay a marginal 1% rate, that is a 1% wealth tax only on those amounts in excess of $50,000,000. So the tax on someone with a networth of $51,000,000 is 1% of $1,000,000 or $10,000. (Note the effective rate is less than 0.02%, much less than the 1% bracket rate).
The last bracket begins at $1,000,000,000 net worth taxed at a marginal rate of 2%. Someone with a net worth of $1,000,000,000, still pays 1% on the excess above $50,000,000, in other words, 1% of $950,000,000 which is $9,500,000.
If someone's net worth is more, say
$1,001,000,000 = $50,000,000 + $950,000,000 + $1,000,000,
they pay $0 on the first $50,000,000,
1% on the next $950,000,000 or $9,500,000,
and 2% on the remaining amount, in that case, 2% on $1,000,000 or $20,000,
for a total wealth tax of $9,520,000. (Note that the effective rate is still less than 1%)
Is this a fair tax?
On the one hand, compared to state property taxes on my house or yours, it is certainly more progressive.
Does it punish the wealthy? One could argue that a progressive tax discriminates, but that is its purpose, to distinguish between one category of taxpayers and another. One could also argue that oligarchs have used their wealth and advantages to influence the government to give them breaks on deductions and business endeavors and other methods of lowering their taxes that most people can't enjoy. Thus, while a very small number of wealthy people control more than 90% of the country's wealth, they do not pay 90% of the taxes.
I see little purpose in trying to argue taxing philosophy here. (Fair warning: My personal opinion is that the massively wealthy have underpaid much of the time since the income tax was first enacted and that the reasons they have used to convince ordinary people that letting them accumulate such vast amounts of wealth have not provided the benefits to the country that they claimed--but that's another story, different than what I propose to argue here.)
On the other hand, consider two loopholes in the wealth tax proposal:
1. Assets must have an assigned value. The value of cash may seem clear because it is the ruler by which other values are measured, but what about financial instruments? The very wealthy have always had great success in manipulating the value assigned their assets to their advantage. Can congress come up with some method of fairly evaluating assets, or will they enact loopholes in the value of assets to advantage rich special interests? If you own real property consider how the "tax value" versus "market value" for your property is assigned to see some of the difficulties. Except for exemptions, property tax rates are not usually progressive, but how fair are the evaluations given on extremely expensive homes? Evaluation is where tax finagling can take place.
Also, the value of assets change. (Is you car worth less this year? Is you house worth more? What about stocks?) A billionaire's net worth can change millions of dollars in a single day. A wealth tax collected each year must have an evaluation date for the assets. Will that date be selectable by the taxpayer or will it be uniform? Will there be exceptions?
The IRS has a similar problem. Compensation for a salaried employee is easy. Determining yearly "income" for the very wealthy is not. Good accountants are very clever about this.
2. Liabilities. More creative accounting? Who except for the very wealthy can afford such accountants and lawyers to show one estimate of liabilities to the tax man and another to a lending institution? You've probably seen such schemes in the news.
On the third hand, as the national debt grows, and government fails to meet its basic obligation of providing value to its citizens, a wealth tax seems worthy of discussion but unlikely to be free of difficulties.
The most common interpretation of wealth I've encountered is that it's equivalent to Net Worth. Basically, Net Worth = assets - liabilities, where assets include the value of all your cash and things you own, and liabilities consist of your obligations and the money you owe.
Hence, if you bought a house for $250,000 and the house is valued at $250,000, then you have a $250,000 asset. If you took out a $200,000 mortgage to finance your purchase of the house, then you also acquired a $200,000 liability. If you also have $5000 in your bank account, then that is an asset. If you bought a car five years ago for $20,000 and paid it off last year, and the current value (Blue Book wholesale price) of that car is now $7000 (because of depreciation, if it were an antique car, it may have appreciated), then you have another asset currently worth $7000. If you buy a second car, a new car, for $18,000 and take out a $17,000 loan to finance it.This give you another $18,000 asset and a $17,000 liability. Suppose this is all of your tangible assets because we don't want to get bogged down with assets like your cell phone or refrigerator or even liabilities like utilities and other taxes.
Then your total assets and liabilities are as follows:
Assets = $250,000 + $5,000 + $7,000 + $18,000
= $280,000
Liabilities = $200,000 + $18,000
= $218,000
And your Wealth is given by
Wealth = Net Worth
= Assets - Liabilities
= $280,000 - $218,000
= $62,000
So suppose that the federal government enacts a 1% wealth tax (which should be called a net worth tax), then
1% of $62,000 = $620.
If this were the proposal, you might want to complain that this unfair, primarily because you don't want to pay another $620 and it is a liability whether you have income to pay it or not. But this it not the current proposal. More on that in a moment. First compare the proposal to property taxes.
If you own a $250,000 house, and two cars with an aggregate value of $25,000 (cars are property in some locales) then you have locally taxable assets of $275,000 without the benefit of reduction by the mortgage liability or financing for the cars. Even if you get a homestead exemption that reduces you asset value for tax purposes by $50,000, you still have $225,000 worth of taxable property. A 1% rate is near the median for all states. Then your straight property tax liability is $2,250, more than three times the amount of the wealth tax on the same properties of $620.
One thing that should be obvious from this comparison, is that the wealth tax rate benefits those who have a lot of liabilities, including those who go deeply into debt, as compared to those who live within their means.
But the currently proposed Wealth Tax is progressive. Like income tax rates, it has brackets. The progressive part means that those in different brackets, pay different rates.
The first bracket rate is 0% for those whose net worth is less than $50,000,000. So if your net worth is $280,000, then pay the exact same wealth tax as someone whose net worth is $50,000,000. That wealth tax is $0.
Those in the next bracket with a net worth of more than $50,000,000 pay a marginal 1% rate, that is a 1% wealth tax only on those amounts in excess of $50,000,000. So the tax on someone with a networth of $51,000,000 is 1% of $1,000,000 or $10,000. (Note the effective rate is less than 0.02%, much less than the 1% bracket rate).
The last bracket begins at $1,000,000,000 net worth taxed at a marginal rate of 2%. Someone with a net worth of $1,000,000,000, still pays 1% on the excess above $50,000,000, in other words, 1% of $950,000,000 which is $9,500,000.
If someone's net worth is more, say
$1,001,000,000 = $50,000,000 + $950,000,000 + $1,000,000,
they pay $0 on the first $50,000,000,
1% on the next $950,000,000 or $9,500,000,
and 2% on the remaining amount, in that case, 2% on $1,000,000 or $20,000,
for a total wealth tax of $9,520,000. (Note that the effective rate is still less than 1%)
Is this a fair tax?
On the one hand, compared to state property taxes on my house or yours, it is certainly more progressive.
Does it punish the wealthy? One could argue that a progressive tax discriminates, but that is its purpose, to distinguish between one category of taxpayers and another. One could also argue that oligarchs have used their wealth and advantages to influence the government to give them breaks on deductions and business endeavors and other methods of lowering their taxes that most people can't enjoy. Thus, while a very small number of wealthy people control more than 90% of the country's wealth, they do not pay 90% of the taxes.
I see little purpose in trying to argue taxing philosophy here. (Fair warning: My personal opinion is that the massively wealthy have underpaid much of the time since the income tax was first enacted and that the reasons they have used to convince ordinary people that letting them accumulate such vast amounts of wealth have not provided the benefits to the country that they claimed--but that's another story, different than what I propose to argue here.)
On the other hand, consider two loopholes in the wealth tax proposal:
1. Assets must have an assigned value. The value of cash may seem clear because it is the ruler by which other values are measured, but what about financial instruments? The very wealthy have always had great success in manipulating the value assigned their assets to their advantage. Can congress come up with some method of fairly evaluating assets, or will they enact loopholes in the value of assets to advantage rich special interests? If you own real property consider how the "tax value" versus "market value" for your property is assigned to see some of the difficulties. Except for exemptions, property tax rates are not usually progressive, but how fair are the evaluations given on extremely expensive homes? Evaluation is where tax finagling can take place.
Also, the value of assets change. (Is you car worth less this year? Is you house worth more? What about stocks?) A billionaire's net worth can change millions of dollars in a single day. A wealth tax collected each year must have an evaluation date for the assets. Will that date be selectable by the taxpayer or will it be uniform? Will there be exceptions?
The IRS has a similar problem. Compensation for a salaried employee is easy. Determining yearly "income" for the very wealthy is not. Good accountants are very clever about this.
2. Liabilities. More creative accounting? Who except for the very wealthy can afford such accountants and lawyers to show one estimate of liabilities to the tax man and another to a lending institution? You've probably seen such schemes in the news.
On the third hand, as the national debt grows, and government fails to meet its basic obligation of providing value to its citizens, a wealth tax seems worthy of discussion but unlikely to be free of difficulties.
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