“Congress! Congress! Don’t tax me —
“Tax that fellow behind the treeâ€
— Anon, circa 1930
Elizabeth’s plan sounds so reasonable, how could anyone find fault with it? A static wealth tax on the super-rich of a few pennies per year on every dollar over $50 million. Come on, who can really find fault with just a couple of pennies from the super wealthy?
The unsavory part of her argument on this issue lies in her promise that no tax increase in other taxes now being paid by the middle class will be necessary to pay for any of her social programs because they will all be financed in the future by the taxes on the super-rich. This is demonstrably not true.
The whole idea of a wealth tax has the super-rich-howling like mashed cats, and has the Republicans from edge to edge with their hair on fire. But her plan is also opposed by a fair number of middle-of-the-road economists, scholars, and tax professionals for the very sound reasons that it would have a repressive impact upon the economy, that it cannot be counted on to produce consistent revenue streams into the future, and that it would be extraordinarily difficult and expensive to administer and enforce.
Let’s take a look at these reasons one at a time:
The Penn-Wharton Budget Model (University of Pennsylvania’s Wharton School of Business) estimated that the wealth tax proposal would cause the nation’s annual economic growth to decrease by 0.2 percentage points each year over ten years, according to a New York Times report. The PWBM was previously applied to Trump’s 2017 tax cut, were it predicted that the cuts would increase economic growth by 0.06 percentage points annually over ten years – a very low figure that did not please the Trump Whitehouse. The model reports that Elizabeth’s wealth tax would be three times more impactful than Trump’s tax cuts, but in the opposite direction. Thud.
Taxing the entirety of one’s wealth by a fixed rate that is anywhere close to the expected ROI (return on investment) from that wealth will, because of normal fluctuations in the economy and over time, inevitably erode the base wealth. Consider for example, according to Forbes, the average ROI for all investment income for fiscal 2018 was 4.8%; the ROI of huge fortunes tend to fall with the range of national averages. If Elizabeth’s tax were in place for this year, her proposed top rate of 6% on billionaires would wipe out the year’s income and erode the base of every fortune with an actual ROI for the year in the range of the year’s 4.8% average. Every year the actual ROI fell below the fixed rate of tax, wealth would be eroded. Further, once it is gone, a recovery to par or above the next year will not return the base to the previous figure.
Bernie touts this aspect as a positive feature of his plan, not a bug. He proposes a maximum tax rate of 8% on wealth over $10 billion, and predicts s that the wealth of billionaires will be reduced by half within 15 years. Bernie wants the super-rich class to eventually disappear and his plan is truly aimed at redistribution of wealth through taxation.
An aspect more practical and easier to understand is the expense and difficulty in administering and enforcing a wealth tax. Although we rely upon self-reporting for income taxes, the process is aided greatly because most income is also measured and reported by third-party sources. Our employers and all manner of individuals and businesses we are in contact with are all obligated to report to the government when substantial income is paid over to us – and in the case of employment, to withhold and remit directly to the IRS an estimated amount against the potential amounts due. This wide net of required reporting plus mandatory employee withholding make the cross checking of sources into a relatively simple matter and bring the overall administration and enforcement of the income tax laws a manageable endeavor.
The measurement and taxation of static wealth, however, is a different matter. The accumulation of wealth is a private matter, and there are few opportunities for reliable third-party reporting, as in the case of income. Consider the difficulties and expense in administering and collecting estate taxes when large estates are involved. In 2018, the IRS audited 1283 returns of estates in excess of $10 million.
It often takes years to complete and close a single estate return that satisfies everyone from the administrators of the estate to the beneficiaries to the taxing authorities. Given the estimate of over 75,000 families with wealth in excess of $50 million, and a target for compliance of auditing one-third of the wealth tax returns filed, this means there will be somewhere around 25,000 wealth tax returns to be audited every year – an impossibility with the IRS at present staff levels, None of the candidates estimate how large the IRS would have to become to service the requirements of the wealth tax returns, or the expense of it all.
Nor do the candidates seriously discuss the efforts and counter measures that will be required to stave off the armies of sophisticated CPAs, lawyers and tax professionals who will come forward seeking ways to avoid or defer the imposition of taxes. An article in a recent on-line journal on tax accounting estimated (with some degree of anticipation, to be sure) that preparation of annual returns for the super-rich who are subjected to the wealth tax proposed by Elizabeth or Bernie could easily exceed $150,000 per return per year. The expected hoopla that will be created when this process has to be repeated for the tip-top of the super-rich every year boggles.
In 1990, twelve of the 34 nations of the free market countries of Europe had in place some form of wealth tax. Today, only four retain this type of tax. According to an NPR report, the countries which abandoned their form of wealth tax did so in the main because (a) they were too tough to administer and too expensive to enforce, (b) too many rich people were fleeing the country and (c) they did not bring in the amounts of revenue (when compared to the cost of administration) sufficient to justify the problems.
Elizabeth estimates that her wealth tax will produce $2.75 trillion over ten years. Bernie says the tax will result in the wealth of billionaires being reduced by half over 15 years. We cannot have it both ways. The inevitable result, once the wealth base begins to be seriously eroded, is that revenues from the tax will begin to dwindle and there will be a need to seek other sources to sustain the social programs.
Final conclusion? If the objective is redistribution of wealth, Elizabeth’s tax is a mechanism that will probably contribute to that goal. If the objective is to develop a steady, dependable source of revenue for the multitude of social programs that are being proposed, this new tax will face many problems. Either way, Elizabeth will have a difficult time with this issue in the general election.
