The voices of Tax Policy Center's researchers and staff
Presidential hopeful and Senator Elizabeth Warren (D-MA) has proposed a tax on wealth that would make ultra-millionaires pay 2 cents! Yep, that is what she said during the CNN debate on Tuesday night. Voters might well wonder how she would raise $2.75 trillion over a decade from rich people who give the government just their 2 cents.
While her debate line left a lot to the imagination, the description of her proposal on her website is a model of how to explain a complicated proposal in clear and concise language. She meets the Gleckman test for taking a proposal seriously though she still may need an informative soundbite.
But I don’t see how her revenue numbers add up. Wealth is not always visible or easy to value—hence taxing it probably is more challenging than taxing income or consumption. There is a reason why the number of OECD countries with wealth taxes dropped from 12 in 1990 to 3 this year.
What would Warren do? She’d tax net wealth (defined as assets less liabilities) in excess of $50 million at a rate of 2 percent and net wealth above $1 billion at 3 percent. She’d include nearly every type of asset in her tax base—from the money in the bank to the very expensive jewels in the vault. Publicly-traded stocks and bonds, pensions, and the value of privately held family businesses also would be taxed.
This is what is known in the tax world as a broad-based tax, and broad-based taxes generally are lauded for reducing the role of taxes in influencing choices (in this case, the type of asset to hold) and for reducing opportunities for tax avoidance.
But measuring wealth turns out to be hard—and probably harder for some assets than for others. When I was a kid, we lived in an affluent suburb of Chicago. In a foreshadowing of my future career, I developed my own distribution of wealth based entirely on the cars people drove (or did not drive). The poorest were the people who traveled by bus and commuter train to work in our suburb. Next were those who drove new Chevys (Mom), followed by drivers of used Pontiacs (Dad), previously owned Cadillacs, and new Mercedes. In my ranking, the richest of all was my grandmother’s cousin Rose, who once a year would arrive by chauffeur-driven limousine. I was right, at least about Rose—a fact I confirmed years later when I found her family listed on the Forbes 400.
And it turns out, valuing wealth is difficult even for the experts. Take a start-up firm, for example. Until the business is sold or its shares are traded on a stock market, how does one value its worth—especially if the product it produces is intangible and flows largely from the brains of its owners?
Or consider a painting thought to be done by “a da Vinci follower” that sold for $60 in 1958. Almost sixty years later, the experts determined it was painted by da Vinci himself. A Saudi prince bought it for $450 million at auction—the highest price ever paid for artwork as of 2017. The painting’s intrinsic value did not change. Its worth just became more visible. Or was it all just a hoax?
Real estate sounds like it should be easy to value for a wealth tax. After all, city officials make property tax assessments, and that information is often available online. Well, back to my hometown Chicago, the owner of my beloved Cubs bought an old house, tore it down, and replaced it with a home twice the size. But somehow the county assessors missed the renovation and kept the old assessment on the books
The current governor of Illinois once let his historic mansion fall into disrepair—most visibly by removing the toilets—resulting in a lower assessment and a reduction of his property tax bill—a feat now under federal investigation. In Cook County, researchers found that rich people were more likely to appeal assessments than those less fortunate. They won too—and often got assessed at amounts below the true value of their home.
Money in the bank? That must be easier to value, right? The bank could tell the IRS how much is in a person’s account at the same time that it reports annual interest income. But it isn’t that straightforward. During the year, the account holder may spend some or all of the money or transfer it from one bank account to another. At what point during the year are those account balances measured for purposes of a wealth tax—on the last day of the year, or would the annual average be taxed instead? And similar issues apply to publicly traded securities, especially for investors who are active traders.
One thing is for sure. The Treasury Department and the IRS would need to issue detailed regulations about how to value assets and pay the wealth tax. But that is how simple soundbites become complicated laws, and how lawyers and accountants get wealthier. And that’s my two cents worth.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
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