“It’s time to fundamentally transform our tax code so that we tax the wealth of the rich, not just their income. By asking . . . top households to pay their fair share, my proposal will help address runaway wealth concentration.”

—Elizabeth Warren

Perhaps no policy proposal has generated more excitement among Democratic voters looking toward the 2020 election than Elizabeth Warren’s “wealth tax”—a tax on the actual balance-sheet worth of wealthy Americans, above and beyond the taxes imposed on their incomes. The idea that some Americans do not pay enough taxes, and therefore need to be taxed annually on their wealth itself and not just on the income the wealth produces, has gained popularity in recent years. Driven by concerns about income inequality, and influenced by the work of the French economist Thomas Piketty, Warren and her fellow senator and presidential candidate Bernie Sanders have made the idea a centerpiece of their presidential campaigns. Their embrace of a wealth tax marks a sizable move leftward in the way American progressives see wealth accumulation, free-market economics, and the role of the state.

Bemoaning income inequality is nothing new, and many proposals have been advanced in the past decade to address the issue. For example, most in the Democratic primary field have embraced higher taxes on investment income as a means of penalizing capital relative to labor. But this policy prescription is by no means universally supported. After President Obama won reelection in 2012, the Bush tax cuts were set to expire, which would have led to an increase in dividend tax rates and capital-gains taxes. So what did the hero of American progressive leftism—popular, reelected, and armed with a team of leftist economic advisers and policymakers—do? He made permanent the lower tax rates on investment income, allowing only a slight increase on the very highest income brackets. That was an increase from the Bush tax-cut levels but not an increase anywhere near the level they were set to revert to. Cooler heads prevailed, for the underlying principle at stake now was very much at stake then: Taxing capital does not merely redistribute capital; it destroys capital. And taxing capital does not merely tax capital; it taxes growth, investment, and productivity.

If increased tax rates on dividends and capital gains were a danger to capital investment in 2012, think how much more is at stake now with the idea of a flat-out wealth tax—an impost not merely on the increase of one’s wealth, but on its mere existence.

As proposed, the tax would not directly affect a huge number of American taxpayers. Warren calls for a 2 percent tax on the total balance-sheet wealth of anyone with a net worth over $50 million (i.e., a tax of 2 percent of all value above $50 million), and a 3 percent tax on anyone with a net worth over $1 billion. These would be in addition to the taxes paid by these wealthy taxpayers on income, investment, property, and consumption.

I suppose this looks reasonable compared with Sanders’s proposal, which calls for a wealth tax beginning at $32 million of net worth, with the rate rising from 1 percent up to 8 percent at higher tiers of wealth.

But there is nothing reasonable about either plan. They are destructive. Twelve developed nations have tried some version of the wealth tax. Nine of them later repealed it. We need to make sure it is not attempted here.

THE RATIONALE FOR A WEALTH TAX IS MISGUIDED

One of the fascinating things about the debate on a wealth tax is the intense disagreement within the highly insular world of leftist economists over the rationale for it: the notion that wealthy people are not paying “their fair share” of taxes. Knowing that the data don’t support the idea that wealthy (even über-wealthy) people in our society are “under-taxed,” Warren came to this fight loaded for bear: She has pointed to a study from two economists at the University of California at Berkeley claiming that the top 400 earners in our society pay a blended tax rate of 23 percent of their income, while the bottom 50 percent of earners pay a blended rate of 24.2 percent.¹

The Berkeley economists arrive at such a startling conclusion by doing a few incredible things with their data. Their study:

a) ignores the child tax credit and the earned-income tax credit. In other words, it pretends that certain taxpayers who literally pay $0 in federal income tax pay anywhere from $1,400 to $5,600 that they do not pay.

b) ignores transfer payments, which essentially means it counts the tax one pays for a transfer of wealth, but not the transfer of wealth itself. When Social Security payments are included, the numbers reflect a highly progressive tax code. None other than Jason Furman, chairman of Obama’s Council of Economic Advisers, had to point this out.²

c) uses projections for 2018 tax receipts made before the numbers for 2018 tax revenues had been released, and with no explanation of how their estimates for the unknowable 2018 data were calculated. What is known is that the authors of the study use a different methodology for calculating tax receipts from the one they used in their own prior work.³ One can be forgiven for wondering why this might be.

The Tax Policy Center of the Urban Institute and Brookings Institution is hardly a right-wing enterprise, and it has concluded that the lowest quintile of American taxpayers pay just 2.9 percent of total federal tax, with the next quintile paying 7.6 percent.⁴ A difference this large between two left-leaning sources would be nearly impossible if both were operating in good faith.

The idea that the American income-tax code as it currently exists is regressive is utterly preposterous and lacks any serious mathematical foundation, as acknowledged by highly progressive economic pundits and institutions. Warren may choose to justify the wealth tax as a means of reducing wealth inequality, or a means of paying for a spending program, but the argument that it is addressing the problem of a regressive tax code is dishonest and easily contradicted by evidence.

But there is another component of the wealth tax’s rationale that warrants even harsher criticism: It fails to understand the very basic realities of wealth itself.

There are obscenely wealthy people in the United States, though I use that adverb only in the plainest and most pedestrian sense possible. I have no number in mind as a ceiling to what the resale value of one’s holdings ought to be. However, no dramatic images of opulence intended to stoke the fires of envy in all of us will change one basic fact. Far and away, the most common use and function of wealth is to facilitate wealth-producing activities. A tax on wealth is misguided for no bigger reason than that it is actually a tax on productive activity.

The tax will be levied on the capital necessary to fund businesses, new technologies, new pharmaceuticals, new medical devices, new construction projects, and innovation. It is easy to isolate a particular wealthy person and think of that person giving up a piece of his or her assets to fund a government program. But the impact across society is a raid on the supply side of the economy, on the productive activities that are the most important in generating economic opportunity.

You may decide to believe (erroneously) that high-net-worth people just hide their money in bank accounts and that the wealth tax would not take from the innovative and productive parts of our economy, but even this notion begs for an understanding of how capital markets work. That “mattress money” Joe Billionaire has “buried” in his bank account is itself the deposit base that banks use to make mortgages, lend to small businesses, and finance economic activity.

The rationale for a wealth tax is wrong because the tax code is already highly progressive, and because the impact of a tax on wealth would be felt by the beneficiaries of wealth-creating activities in a free society—those whom Warren claims to want to help. Confiscating wealth from wealthy people satisfies a class-warfare agenda, but it takes productive capital and makes it nonproductive capital—the most misguided notion in all of economics.

A WEALTH TAX IS UNCONSTITUTIONAL

The Constitution prohibits federal direct taxes that are not apportioned by population (Article I, Section 9, clause 4). Federal taxes can be levied only in proportion to the state’s population as determined by a census. This rule was put in the Constitution precisely for the purpose of making direct taxation very difficult. The 16th Amendment, which entered the Constitution in 1913, makes an exception for the income tax. The income tax is a very direct levy, assessed on individuals with no regard to the apportionment of the population in their state, as the Supreme Court affirmed. It is because the income tax was a direct modification of Article I, Section 9 that a constitutional amendment, not merely a bill, was required for it to become law.

A “wealth tax” is, in any possible interpretation of the English language, also a “direct tax,” and such taxes have to meet the apportionment requirement of the Constitution. A wealth tax cannot be apportioned by population and state; wealthy households are obviously not conveniently distributed around the country in proportion to the states’ populations. The language of the 16th Amendment makes it clear that a wealth tax would not be included since it gives Congress “the power to lay and collect taxes on incomes, from whatever source derived.”

THERE IS NO PRACTICAL WAY TO INSTITUTE OR ENFORCE A WEALTH TAX

Untold trillions of dollars of “wealth” exist in the United States in the form of closely held businesses, real estate, illiquid assets, and any number of other assets and legal structures that cannot be valued accurately by any available method. This is typically not a problem for a high-net-worth person; what he could get for his family car-wash business is irrelevant if he is not planning to sell. Owning a chain of hotels (some of which may be under construction) creates no need to know what their “value” is on any given day. The cash flow, the net operating income, and of course the business outlook all matter—but establishing a “sticker price” is inconsequential. That would not be so with a wealth tax. Under its terms, a market value would have to be determined for assets that defy such measurement, and real-life measurable cash (i.e., the tax) has to be paid based on that fantasyland figure.

Cash and publicly traded stocks offer nearly perfect price transparency when it comes to “valuing” them (cash has a par value, by definition, and stocks function on exchanges in which not only are prices created in real time but the spread between the bid price and the ask price is nil). If a wealth tax came into being, the incentives to move capital into highly opaque, mysterious, difficult-to-ascertain-price assets becomes overwhelming. Perhaps the medium of choice would be art and collectibles. Certainly, we know that complicated consortiums of private businesses wrapped in various LLCs, trusts, and offshore entities would become irresistible.

And this is not simply a comment on the human nature of high-net-worth people seeking tax minimization. Nor is it merely a comment on the reality of tax evasion (though it is that, too). Rather, it is a fundamental critique of the impossibility of the task itself—valuing what cannot be valued. Asking a family that owns significant timberland or farmland or vineyards or a chain of frozen-yogurt stores to come up with a cash “value” of these things every year, and then to write a check based on that value is to demand the impossible—though compelling the task would be a gift of indescribable value to accountants, lawyers, appraisers, and other such service professionals who would be the only real beneficiaries of such a policy.

More than 65 percent of the wealth of $1 billion-plus households is already in their various business interests. These businesses have loans that are measurable, but they also have loan guarantees; how would those guarantees get valued in calculating a wealth tax? They generally have goodwill, intellectual property, and other such intangibles on their balance sheets. How are patents and copyrights to be valued in this annual calculation? Are IRS agents suddenly going to become experts in, say, appraising a music catalogue and producer royalties?

The perverse incentives such a tax would create are countless. Do we really want to incentivize ultra-high-net-worth married people to not be married? That has happened in countries where the wealth tax was imposed, since a wealthy family can split its net worth into two half-as-wealthy families after a divorce. Do we really want to incentivize CEOs to push down their stock value at the end of each year to reduce their own personal tax burden? Do we really want more opaque ownership structures for stock, options, and the like that delay receipt of income for tax purposes? Do we really like the idea of a massive national incentive to talk down one’s net worth, and a national incentive to take actions that reduce it, either superficially or substantively?

The reality is that the large, mega-cap, multinational publicly traded companies—whose stock is publicly valued—do not make up the backbone of the economy. Their significance to the national economy pales in comparison to the impact of family-owned businesses, small businesses, multigenerational companies, and any number of such enterprises that would be victims of such a misguided policy.

So a wealth tax that is supposed to help middle-class Americans by a massive redistribution of wealth would essentially take capital from the backbone of America’s economy—the vast network of closely held businesses, American entrepreneurial success stories, and, yes, the most common employers of America’s middle class.

Here is another reality that Elizabeth Warren is not going to address in her campaign: If the “wealth tax” includes exemptions, the wealthy will find ways to use those exemptions to skirt the tax; and if it doesn’t, the things that otherwise would be exempted will be hurt far worse than the high-net-worth taxpayers subject to the tax.

Let me illustrate the point. Let’s say municipal bond investments are exempted in one’s calculation of net worth, as they would likely be since they are so crucial to the good working order of school districts, hospitals, toll roads, state funds, and any number of other public-works projects. Under this scenario, the wealth tax can be skirted by massive deployment of capital to municipal bonds (which would boost their price level and distort markets by pushing bond yields lower). And if they are not exempted (and Warren has made no suggestion that they would be), a wealth tax will effectively raise the cost of running schools, medical facilities, highways, and the like.

The wealth tax would invite evasion, misallocation, distortion, and the subsidizing of a cottage industry of advisors who will aid and abet the minimization of the liability. It would attempt to do the impossible (value what cannot be rationally valued), and it would risk depleting needed capital projects in our society (charitable, municipal, etc.). It is impractical and unenforceable at its core, as France learned and had to concede. After fumfering with one for more than 30 years, France got rid of its wealth tax in 2017.

THE PROJECTED REVENUE GENERATION FROM A WEALTH TAX IS MASSIVELY OVERSTATED

The left-leaning Keynesian economist Larry Summers, who was treasury secretary under Bill Clinton and the chairman of Obama’s National Economic Council, has been particularly critical of the assumptions made by Elizabeth Warren and her advisers about the revenue a wealth tax would generate. He looked at the actual revenue raised by the estate tax as a way to estimate what a wealth tax would bring in. (The estate tax is a kind of wealth tax: It’s a levy on the generational transfer of wealth that takes place when someone over a certain net worth passes away.) That threshold is currently $11 million for a single person, but it has been set at a number of different levels far lower than that over the past 20 years.

Summers determined that the revenue generated from a wealth tax would be just 12 percent of what Warren’s campaign estimates; even with preposterously optimistic adjustment to inputs, he could get the number only as high as 40 percent of Warren’s estimate.⁵ Summers also argued (with a finger pointed at himself) that policymakers have every incentive to believe overly optimistic revenue estimates, no matter how strong the testimony of history is against such projections.

It was the ease of avoiding wealth taxes that caused Denmark and Sweden to ditch theirs. The difficulty of implementation is a large part of the reason they did so, but the shortfall in revenues collected was the deciding factor.

Right now, the Internal Revenue Service is unable to audit even 10 percent of millionaires. The resources for enhanced collection, valuation, and instigation simply are not there, not to mention the problem of superior intellectual resources (and motivations) available to the taxpayers.

Of course, when a wealth tax inevitably falls short of political promises and projections, the obvious next step is what is always, always done in the world of compulsory taxation: You expand the base of taxpayers subject to the tax. Does anyone who has studied the history of the income tax, consumption tax, alternative minimum tax, property tax, or investment tax want to argue that Warren’s $50 million threshold for a wealth tax would not drop over time?

The wealth tax would fail to deliver the revenues it promises, but you can be sure Warren’s spending bills would never fail to exceed their promised expense. The truth of these two statements should be clear to anyone regardless of his viewpoint on the tax itself.

A WEALTH TAX IS IMMORAL AND UNFAIR

The wealth tax is indeed misguided as a practical matter, unconstitutional, unenforceable, and overhyped, but it also is wrong. It is rooted in a principle that cannot be proven or defended: that those who have accumulated extreme wealth did something wrong to get it.

Of course, if they did something illegal, they should be prosecuted. Fraud, extortion, embezzlement, and theft are already against the law. We don’t need to noodle around with a 3 percent annual tax on lawbreakers. But if they didn’t break any laws, then our own emotional response to the magnitude of their wealth is irrelevant, and to make public policy (punitive policy at that) out of our emotional impulses is immoral.

There are people who have inherited tens of millions of dollars of wealth, and perhaps we don’t feel a passion to defend their good luck at birth. That certainly doesn’t give us the right to confiscate their property, not in a civilized society founded on law and order. And it is utterly illogical to create a policy designed to penalize a successful entrepreneur whom the free marketplace has rewarded with great wealth after years of risk, hard work, and sacrifice, just because we don’t like that he and others have come to live wonderfully comfortable lives as a consequence. Again, we don’t arbitrarily do such a thing, because it is wrong—it violates the most ancient of ethical principles found in the Ten Commandments (prohibitions against theft and covetousness).

We also must recognize that capital in our country is taxed as it is accumulated (through an impost on the income that generates it) and then taxed again as the fruits of that (already-taxed) labor are invested (through dividend and capital-gains taxes). I have argued for years that investment taxes are double taxation, but a wealth tax is quite literally a triple tax. This is not moral.

Using the tax code to punish American citizens is wrong. The rhetoric of “fair share” has been abused long enough in debates about our income-tax code. A pile-on wealth tax is flawed for all the reasons outlined above, but no reason is more important than the immorality of this confiscatory, envy-soaked idea.
From its perverse incentive to break up families to its dubious claims about the nature of the present U.S. tax base, the wealth tax is a dangerous and destructive policy idea already rejected by European socialist nations. Its revenue promises are disingenuous at best and dishonest at worst. It attacks the productive purpose of wealth—the creation of economic activity—more than it attacks the personal wealth of high-net-worth taxpayers. And, worst of all, it is a thoroughly immoral tax designed to play into people’s natural resentment of those wealthier than themselves. It is but one of the many reasons to reject Elizabeth Warren and her dangerous ideology.

^{1 Saez, Zucman, The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay, W. W. Norton, 2019
2 Quartz.com, Allison Schrager, October 12, 2019
3 American Institute for Economic Research, Phillip Magness, No, the Poor Don’t Pay Higher Taxes Than the Rich, October 8, 2019
4 The Tax Policy Center, Urban Institute and Brookings Institution, Briefing Book, 2019
5 Lawrence H. Summers, “A Wealth Tax Presents a Revenue Estimation Puzzle,” Washington Post, April 4, 2019}

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