What is a wealth tax? Today, wealthy Americans pay taxes on things like yachts and fine art when they purchase them, but not after. A wealth tax would make them pay taxes on their assets every year.
Democratic presidential candidate
Elizabeth Warren would apply an annual asset tax of 2 percent on households worth more than $50 million and 6 percent of worth greater than $1 billion (recently revised up from 3 to 6 percent).
There are some significant downsides to the wealth tax that the Democratic presidential candidates fail to mention while campaigning. First, rich folks do not put their excess cash under a mattress; they invest it and pay taxes on the interest and dividends. The wealth tax takes money out of the hands of those who invest and provide the continuous flow of capital which, of course, is the fuel for capitalism.
Second, the wealth tax would apply to an estimated 75,000 households. There are already 73,500 full-time IRS employees. How many more thousands of employees would they need to expertly administer the wealth tax? Big government getting bigger.
Third: Wealthy people have competent tax lawyers who know how to apply tax avoidance measures. The only way to prevent this is to rewrite the tax code and eliminate the loopholes. Additionally, the wealthy can move assets to trusts and family foundations or shift property among generations.
Fourth: The wealth tax is a proven failed system. In 1990, a dozen nations in the Organization for Economic Cooperation and Development imposed wealth taxes. By last year, it was down to three. France was the latest casualty.
Fifth: A significant amount of wealth held by the rich is in hard-to-value assets, such as art. Will the valuation be accomplished in 75,000 households by thousands of contract experts or by IRS amateurs? How will the taxpayers appeal contested valuations? Thousands of households could end up in litigation for months or years.
So let’s look at a possible scenario. A 40-year-old entrepreneur is worth $500 million and therefore required to pay a wealth tax. His 2 percent wealth tax due is $10 million. Because he consistently invests excess cash and after paying state and federal income taxes, he is short of cash to pay the wealth tax.
Not to worry, Elizabeth Warren says, “l have a plan.” Rather than force the taxpayer to sell resources and pay cash, he can tender a portion of his non-liquid assists to the government. Now he has a new business partner who may well be some nameless, faceless, possibly incompetent bureaucrat in Washington. Extend this over the next 20 or 30 years, 2 percent every year, and what does he have remaining? Then he dies and his estate pays a 40 percent death tax on the remaining assets. This is a nightmare scenario that could play out across the country.
Because of the downside reasons to these things above, rich people figure out how to move their wealth abroad. This is the principle reason other countries dropped the wealth tax.
Warren has developed the wealth tax issue in response to questions about how she proposes to pay for Medicare for All. And she sells this new tax revenue stream as if it is all that will be needed. The wealth tax on personal fortunes exceeding $50 million would raise $3.75 trillion over the next decade, ($375 billion per year) as part of the $34 trillion needed. That $375 billion would provide about 13 percent of what is required for one year of Medicare for All. Will the middle class pick up the remaining 87 percent?
Warren’s economic advisers, Emmanuel Saez and Gabriel Zucman, have been widely criticized by economists writing for The Wall Street Journal as being overly optimistic about both the amount of wealth tax that will be available for Medicare for All and also for the overall cost of Medicare for All.
While it has been widely reported and generally accepted that Medicare for All will cost about $34 trillion over a 10-year period, Warren and her advisers have set that figure at $22.5 trillion. Thereafter their tax-raising goal has been $22.5 trillion, or $2.25 trillion per year.
As if the above numbers are not misleading enough, Warren also claims Medicare for All will actually save money because of economies of scale for a government-run program. There is zero data to support such an outrageous claim, but there are numerous examples of the incompetence of government whenever it is charged with running a large operation.
For example, government-run Amtrak has reported operating losses every year since its inception in 1971, averaging $900 million per year with 93 percent of its routes unprofitable. The per-ticket taxpayer subsidy over the past five years has been $51 per Amtrak ticket sold.
It’s time to look at the whole Medicare for All story. And while you are at it, look at Warren’s list of 56 other new programs that will require more funding, more government control, more bureaucracy and more regulation.
Lt. Gen. Marvin L. Covault U.S. Army (ret.), is the author of “Vision to Execution,” a book for leaders.