Government

Is Imposing A Wealth Tax A Good Idea?

Is it better to encourage the wealthy to invest in the private sector or non-profits instead? And will it create any distortions in economic behavior?

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A few days ago, a group of wealthy Americans wrote an open letter to the 2020 presidential candidates asking that they and their peers — 0.1 percent of the richest Americans — be subject to a wealth tax. The letter cites Senator Elizabeth Warren’s campaign proposal: a 2 cent per dollar tax on assets after a $50 million exemption and an additional 1 cent on the dollar tax on assets over $1 billion.

They claim that the revenue from the tax would be used to fight climate change, expand health care, provide student loan debt relief, and modernize infrastructure to name a few.

Finally, they claim that the majority of Americans support a wealth tax for the financially well off. Of course people will support a tax that they don’t have to pay.

These calls to “tax us more” are nothing new. Every so often, usually before an election, a faction of the ultra-wealthy for whatever reason thinks their group does not pay enough taxes. Some believe they are being enlightened and altruistic. Others suspect they are suffering some kind of wealth or privilege guilt.

Critics say that these statements are illusory and even condescending. If these people care so much about the deficit and inequality, they should be the first to contribute to the public fisc. They can do this either by artificially inflating their tax bill or making a donation to the Federal Bureau of the Fiscal Service. According to the bureau’s website, for the last three years, the average yearly donation totaled $2.69 million. This is not a lot considering that the federal government received $3.38 trillion dollars in revenue during the 2018 fiscal year. From that perspective, the yearly donations are not enough to cover the daily accrued interest of the federal debt. It’s like going to a Kickstarter page and donating a measly $1 in exchange for a simple “Thank You” email.

I’m not going to opine on whether a wealth tax will work. Instead, I want to highlight some of the issues I had with this letter.

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First, they might regret this if the wrong people are in charge of the government. While the authors claim that the letter is nonpartisan, it is very likely they are reaching out to the Democratic presidential candidates as they are more likely to implement a wealth tax. They also claim to be more receptive to addressing climate change and wealth inequality. But let’s suppose the Republicans sweep the 2020 elections and proposes their own version of a wealth tax. Would the authors support it then? Will they agree with the conservatives’ approach and interpretations to everything they addressed in their letter?

Second, there might be more effective ways to accomplish the author’s goals. Look, it is great to want to improve health care and fight climate change and wealth inequality. Few people would disagree although reasonable minds can differ on how to do it.

There are many non-profit organizations that exist to improve the environment or to provide free or low-cost health care. Some of them could face financial problems if their donor base erodes due to a recession or some other unexpected event. The authors can use their fortunes and connections to either help new or existing organizations have a steady donor base. Or they can set up new organizations in an underserved area.

As the presidential candidates prepare their agendas, the wealth tax will be one topic up for debate. The open letter indicates that there is at least some support from unlikely allies. But will their peers agree with them? Will there be a feasible way to value taxable wealth when the ultra-wealthy are likely to own all kinds of assets? Is it better to encourage the wealthy to invest in the private sector or non-profits instead? And will it create any distortions in economic behavior? These are the questions I hope will be answered as the presidential race continues.

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Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at sachimalbe@excite.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.

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