Sen. Warren’s Wrong-Headed Wealth Tax

Sen. Elizabeth Warren’s (D-Mass.) has proposed a “wealth tax” on individuals with wealth valued at more than $50 million. After $1 billion in wealth, the tax would increase from 2 percent to 3 percent. The plan is popular… and unworkable.

I believe government should cover its basic costs, especially in good economic times. This is not a unique belief, as no less than John Maynard Keynes suggested running a surplus in good times to help offset deficit spending during emergencies and downturns. So, with deficits at $1 trillion, it’s time to raise some revenues and cut some spending. Both are needed.

First, there is little chance a wealth tax passes Constitutional challenges. It will be in the courts for year, and there is absolutely no chance the Constitution would be amended for a wealth tax. As Jeffrey Levine pointed out on Forbes this week:

There Are Serious Questions About The Constitutionality Of A Wealth Tax

…[It’s] not really possible to talk about Senator Warren’s Wealth Tax proposal without at least mentioning the potential constitutional issues it faces. In short, Article 1, Section 9 of the Constitution reads:

“No capitation, or other direct, tax shall be laid, unless in proportion to the census or enumeration herein before directed to be taken.”

Now if you’re thinking to yourself, “Hey, wait a minute! What about the income tax? Surely some of the higher-income states like Connecticut pay more than their proportionate amount of income taxes.” You’re absolutely right. They do. And that would be in direct violation of the Constitution… If it weren’t for a little thing called the 16th amendment, which reads:

“The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.”

Note that the 16th Amendment’s language expressly authorizes Congress to collect taxes based on income without having to make those taxes proportionate to the states. It makes no reference, however, to any sort of tax based upon an individual’s wealth or property ownership.

You can argue all you might about how good an idea is, but unconstitutional is unconstitutional. A Pres. Warren might be able to push for a wealth tax, and even sign it into law. Then? The current Supreme Court would strike it down, and many progressive legal scholars would, too.

But we have an inheritance tax. That’s a wealth tax!

No, it is not.

The wealthy person died: he or she is not being taxed. In fact, a wealthy person was already taxed. Instead, this is a transaction tax, in some ways an “unearned income” tax. When you inherit money, property, or other assets, it is a capital gain — which courts have held is perfectly legal to tax. Gains are taxable, even though they are often taxed at a lower rate than the top marginal tax rates.

If we want to increase revenues, increase the inheritance tax. Even well-known libertarian economists support (or supported) high inheritance taxes because they are not representative of wealth of merit. Inheritances are luck. Sorry, but winning the lottery is taxable. I’ll blog more on the inheritance issue and tax rates, plus you can read “The 90% Tax Rate Myth” from 2011.

A wealth tax is unworkable.

If you tax wealth, who will be assigning the wealth value? How much is a patent work? A painting? A classic car? Something as simple as a house?

I’m not sure about where you live, but in Western PA, a lot of families challenge their property tax assessments. Businesses do, too. Houses should be “easy” to assess at market value, with real estate appraisals needed for selling, buying, and refinancing homes. Yet, appeals are common.

Now, imagine someone appealing every assessment in a massive, millionaire or billion dollar portfolio. On what day will stocks and holdings be counted for tax purposes? What about items without tangible value, but intellectual value? Values change, so there needs to be a finite window for appraisal.

The inheritance tax is imperfect, with many appeals, and that tax happens once. An annual tax on wealth? That’s a logistical nightmare. The IRS would need to employ or contract with an army of specialized appraisers for everything from art to song lyrics. The time and effort to enforce and collect the tax becomes a problem.

Once appraised and taxed, the property is taxed again… and again… and again. If you own a painting worth $20 million, the painting might lose value because it includes a never-ending tax liability. Art only has value when people want to own it. If the wealthy decide they don’t want large collections, maybe art declines in value. And are you going to tax art donated or loaned to museums? Those loans to galleries have value, too.

Of the nations in the Organization for Economic Co-Operation and Development (OECD), only four have some manner of wealth tax. From the 1990s through 2017, eight other nations gave up on the wealth tax concept. Wealth taxes lead to complicated avoidance schemes and endless appeals of appraisals. There’s a reason we tax income federally and property locally.

When I post on marginal rates (again) and other ways to raise revenues, I will address the concept that local and state taxes can and should support more of what we expect from government. I might not like what states would do, but states have greater legal flexibility to experiment with various taxation approaches.

It seems the national wealth tax is more about envy and easy marketing than raising revenues — other plans raise more money with less effort and fewer legal challenges. Envy is not a good policy, and envy explains much of the popularity of plans to “soak the rich” in some way. There are better approaches to collecting more revenue to support government, but with the 2020 campaign underway expect bumper-sticker economics.

We must pay for what we collectively want from local, state, and federal governments. Again, whatever the majority demands in terms of budget priorities — and I ’ll be on the losing side of most such debates — we need revenues to support those demands.

The wealth tax isn’t the best solution: it is likely unconstitutional and unworkable.