Wealth Tax Blues

The recent insurrection on the United States Capitol, inspired by the populist former President Donald Trump, was a function of rising income inequality and the outsized influence of dark money in the political process.  The political process was stressed to a breaking point, and absent the resolve of a few principled people democracy in the United States could have broken.  Correction of such issues is a vital step toward stabilizing democratic institutions and ensuring the durability of the republic.

Tax policy think-tanks funded by corporations and wealthy individuals frame the taxation discussion as a matter of ‘fairness’ and point to the outsized contributions to the federal treasury by wealthy individuals.  Framing the argument in the context of fairness dictates the outcome of the dispute but cleverly skirts the central principle that fairness is not the purpose of taxes.  Taxes are a social construct and agreement as much as a means to provide the revenue necessary to fund the United States government.

A national wealth tax, a tax on individuals’ net worth, is one of the policy options under discussion to support vital infrastructure, social service, and other governmental functions.  Tax policy provides a central context in which collective judgments, accrued as a democratic covenant about fundamental values, form a national credo. 

​Legislators could earmark wealth tax revenues strictly for use in infrastructure development thereby providing enduring sources of wealth creation for average Americans.  Directing such funds to the general treasury is the general avenue of discussion.

Artist's Concept of the $500 Million Bezos Yacht

Billionaires often spend their incredible wealth in outrageous excess.  For instance, Jeff Bezos recently commissioned the construction of a $500 million yacht.  Bezos is now worth around $200 billion, an increase of $75 billion in the last year alone, and his super-yacht that requires its support yacht was just beer money.  Such staggering excess helps build class resentment and contributes to social instability.

Facts about economic inequality in the United States:

• The wealthiest 1% of Americans possess 42% of household wealth.
• The top 0.1% of Americans' (net worth more than $20 million) share of national wealth has tripled to 22%.
• The spiraling wealth disparity disproportionately harms racial minorities as the median net worth of a white household ($141,900) is thirteen times that of the median black household ($11,000).

​In a republic originally formed as a breakaway from a totalitarian kingdom, the billionaire class has become the new royalty, forming a leadership because of only their wealth, as if the skills required to accumulate and hoard immense amounts of money translate into effective societal leadership. 

​Advocates for the super-wealthy claim they give back to charity and so whitewash their lavish lifestyles.  For every dollar a billionaire donates to charity, taxpayers chip in anywhere from 37 to 57 cents in the form of lost tax revenue, depending on the status of the donor’s tax avoidance strategies. Taxpayers effectively provide matching funds for the donation priorities of these super-wealthy individuals, with no input from a democratic process.

Bill and Melinda Gates in Happier in Even More Fatuous Times

Boosters for the super-wealthy continue to play the fairness tune and there is no doubt the United States tax code is progressive.  Effective tax rates – calculated as the total income tax owed divided by adjusted gross income – rise with income.  Taxpayers making less than $30,000 paid an effective rate of 4.9% in 2015, compared with 9.2% for those making between $50,000 and under $100,000, and 27.5% for those with incomes of $2 million or more.

But the system starts to lose its progressivity at the very highest levels.  In 2015, the effective rate peaked at 29.3% for taxpayers in the $2 million-to-under-$5 million groups, then fell to 28.8% for the $5 million-to-under-$10 million groups and 25.9% for those making $10 million or more.

​The basic facts about a wealth tax:

• A wealth tax would lessen rising wealth disparity.
• The tax would raise significant revenue to address debt and deficit concerns and fund a variety of social programs.
• A wealth tax could capture some income sources the United States does not tax like unrealized capital gains or types of imputed income.

The Tax Policy Center (TPC) modeled three theoretical wealth taxes:

• A tax equal to 1% of net wealth over $20 million ($40 million for joint filers).
• A tax equal to 1% of net wealth between $20 million and $100 million ($40 million and $200 million for joint filers) and 2% of net wealth over $100 million; and 3.
• A tax equal to 1% of net wealth between $100 million and $1 billion and 2% of net wealth over $1 billion.

The TPC estimated these three versions would raise $1.1 trillion, $1.6 trillion, and $800 billion in revenues, respectively, in the first 10 years.  For comparison, the federal budget for the 2020 fiscal year was originally set at $4.79 trillion. While the hypothetical values raised by the wealth tax would be considerable, they are not large enough in terms of contribution to the federal treasury relative to the wealth, and the marginal rates considered should be higher.

​While cheerleaders for the super-rich imply a wealth tax would affect many ‘regular folks’ the numbers lead one to a different conclusion.  Regardless of commonly proposed plans (Bernie Sanders’ or Elizabeth Warren’s), the number of Americans subject to such tax would be less than 200,000.  Those 200,000 people comprise less than 0.06% of the population of the United States.  These proposed taxes would not affect family farmers, small business owners, and highly compensated professionals.

Under most normal circumstances taxing the wealthy at higher rates and particularly taxing the incredibly wealthy through an annual wealth tax would seem to be a politically viable fix for a lot of problems.  While explicitly ruling out a conspiracy theory, the ultra-rich must delight in the predominant debate about transgender athletes, gun control, abortion restriction, and other similar divisive issues.

Legislators in more than 20 states have introduced bills this year that would ban transgender girls from competing on girls’ sports teams in public high schools.  Yet in almost every case, sponsors cannot cite a single instance in their state or region where such participation has caused problems.  In the few states that do collect empirical data, the numbers of high school transgender athletes are minimal.  There are five transgender high school athletes currently in Kansas and nine in Ohio in the past five years.

Hired guns plead the case on behalf of the uber-rich that a tax on the assets of the super-wealthy create administrative complexity and result in several unanticipated consequences.  There are some issues but solutions are evident.  Tax collectors could derive the valuation of land and buildings from state and local property taxes.   Templates are provided by private companies that provide estimates of market values for real estate.  Valuation of land and property held abroad may be more difficult from an administrative and verification perspective.  

One consideration is not all assets have a readily available market value.  Most United States businesses are partnerships, sole proprietorships, S corporations, LLCs, are privately held, and so it is very difficult to assess their value.  For items such as fine art, wine, antique cars, jewelry, and other collectibles, there is often not a referenceable liquid market for valuation purposes.  Valuing intangible assets such as patents, or copyrights could be one of the more difficult aspects of levying a wealth tax.

The wealthy would challenge the imposition of such a wealth tax in court.  There is considerable discussion among legal experts about a federal wealth tax is permissible under the U.S. Constitution, which requires that a “direct tax”—which some legal scholars contend a wealth tax is— requires apportionment among states according to population.  Given the current composition of the United States Supreme Court, the outcome of such a challenge would be a coin toss and perhaps render consideration at this time moot.
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Regardless serious consideration of the growing disparity of wealth distribution in the United States is necessary otherwise the future of the republic will remain in jeopardy.  Given the composition of the United States Supreme Court and its anticipated hyper-conservative rulings, a more effective strategy would be raising marginal tax rates to their pre-Reagan values.  This would reverse wealth accumulation and restore some societal stability.