STUMP » Articles » Taxing Tuesday: Save Us Rich People From Senator Candidates » 29 January 2019, 05:30

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Taxing Tuesday: Save Us Rich People From Senator Candidates  


29 January 2019, 05:30

Elizabeth Warren to propose new ‘wealth tax’ on very rich Americans, economist says

Sen. Elizabeth Warren (D-Mass.) will propose a new annual “wealth tax” on Americans with more than $50 million in assets, according to an economist advising her on the plan, as Democratic leaders vie for increasingly aggressive solutions to the nation’s soaring wealth inequality.

Emmanuel Saez and Gabriel Zucman, two left-leaning economists at the University of California, Berkeley, have been advising Warren on a proposal to levy a 2 percent wealth tax on Americans with assets above $50 million, as well as a 3 percent wealth tax on those who have more than $1 billion, according to Saez.

What kind of assets?

Oh, man, I can see so many problems with this one.

So many assets individuals own are not market-valued. We know that value only when a transaction occurs.

The wealth tax would raise $2.75 trillion over a ten-year period from about 75,000 families, or less than 0.1 percent of U.S. households, Saez said.

Warren’s campaign declined to comment on details of the plan.

I bet they haven’t.

The thing is, the government has little way of knowing rich people’s actual wealth. What about all the “illiquid assets” they own — like fine art? If it’s paintings they’ve owned for decades… who is paying for that valuation?

Warren’s proposal includes at least three new mechanisms to combat tax evasion, according to a person familiar with the plan. Those are a significant increase in funding for the Internal Revenue Service; a mandatory audit rate requiring a certain number of people who pay the wealth tax to be subject to an audit every year; and a one-time tax penalty for those who have more than $50 million and try to renounce their U.S. citizenship.

So… they’re going to bring in antique appraisers? Experts in valuing ownership in a hedge fund? Do you know how insane this will be?

The wealthiest 1 percent of families currently face a total tax burden, including state and local taxes, of about 3.2 percent relative to wealth, Saez and Zucman write in their letter.

That actually sounds like a really high rate to me. How do their tax rates compare to their actual cash flows? This is very stupid.

And possibly unconstitutional.


The Kulaks Must Be Liquidated as a Class

Senator Warren apparently has found her guiding spirit and has announced along with her presidential campaign a campaign of economic terror based on force, not law. Specifically, she has proposed to begin seizing a portion of the assets of some wealthy Americans, a course of action that the federal government has no constitutional power to undertake. The seizure of assets is a fundamentally different thing from the taxation of income, which itself took a constitutional amendment to implement. What Warren is proposing is essentially a federal version of the hated asset-forfeiture programs that have been so much abused by law-enforcement agencies — minus the allegation of criminal misconduct and made universal and annual.

The senator is in a bit of a panic: She hadn’t expected to face a challenge from her left in her quest for the Democratic nomination, but as her entire party lurches in a chávista direction, she has been forced to go one step farther lest she fall into the “moderate” class, whose members almost certainly will be slaughtered in the 2020 Democratic primary. And so she proposes this ridiculous and illegal course of action.

Funny thing about Senator Warren’s asset-forfeiture scheme. Like many similar proposals, it probably would not raise much revenue and might in fact leave the country as a whole economically worse off. And the people advising Senator Warren on that are perfectly content with that outcome, because, as Emmanuel Saez and Gabriel Zucman argue in the case of Representative Alexandria Ocasio-Cortez’s proposal to radically increase income taxes, this is to be understood not as an economic question but as a moral one: It is simply morally obligatory to hurt wealthy people. “The point of high top marginal income tax rates is to constrain the immoderate, and especially unmerited, accumulation of riches,” they write.

How do they know it’s unmerited?

Oh, sorry Kevin, I stepped on his line.

And who gets to decide what’s merited and what’s unmerited? What are the chances that, say, Senator Warren’s modest millions or her multimillion-dollar home are deemed “unmerited”? What decides, of course, is “unrestricted power based on force, not law,” because the law cannot substantially answer that kind of question but can only instead encode the desires of people with power, which is what Senator Warren is seeking more of.
Saez and Zucman write hopefully of the prospect that high tax rates would make the class of people with larger incomes “largely disappear.” Representative Ocasio-Cortez declares it “immoral” that we have a “system that allows billionaires to exist.” Marshall Steinbaum, the research director of the progressive Roosevelt Institute, wrote: “It’s increasingly clear that having wealthy people around is a luxury our society can no longer afford.”

Why is it immoral that some people are billionaires?

I mean, I find it putrid so many politicians and other rent-seekers have become rich (“magically”) on the public dime. One does wonder how someone like Bernie Sanders amassed three homes.

Anyway, no, I’m not that rich, but given how very little money they’d be able to get from this, and how little it would actually prevent billionaires from being tricksy (as in, all of them moving to Zurich… good luck getting to their assets to figure out a full valuation), I would assume if they could get it seen as legal, they’d be pushing the wealth tax down to those who have positive net worth, forget about the “rich”.


Sen. Warren’s Wealth Tax Is Problematic

Today, Senator Elizabeth Warren (D-MA), Democratic presidential hopeful for 2020, announced plans for a wealth tax on high-net-worth individuals, a type of tax that is flawed economically and administratively. (There are also constitutional questions about assessing a wealth tax.)

According to The Washington Post, Senator Warren’s proposal would assess a 2 percent annual wealth tax on individuals with more than $50 million in net worth, increasing to 3 percent on those with more than $1 billion in wealth.

Wealth taxes are not a new idea—they date back hundreds of years—but have been used less and less frequently. In 1990, 12 member countries of the Organisation for Economic Co-Operation and Development imposed a wealth tax; today, only four do. Countries have dropped the taxes due to the challenges they pose.

First, these taxes are difficult to administer. The uber wealthy tend to have very hard-to-value assets. They own more than publicly-traded stock, such as real estate holdings, trusts, and business ownership interests. It is difficult to value these assets on an ongoing basis. Imagine a large privately-held company—its value could change almost daily. How would the tax handle these fluctuations?

This is a challenge currently facing the Internal Revenue Service (IRS) when administering the estate tax, but one faced only once by an individual. Here, the problems would multiply as the tax would be assessed annually on a much larger share of individuals.

Here’s the thing — with federal estate taxes, the valuation needs to be done only once, at a very specific time.

Not every year.

Or every quarter.

Second, these are poorly targeted taxes on capital. Usually when designing a tax on capital or capital income (these are ultimately the same) you want to target what are called super-normal returns—returns over and above the amount needed to compensate someone for saving and delaying their consumption. At the same time you want to exempt, or lightly tax, normal returns to investment.

Imagine a saver who expects a normal return and makes an investment. Her decision was based on the after-tax return. But suddenly, the investor receives a super-normal return, which, in her case, would be unexpected. Getting taxed on those surprise super-normal returns doesn’t have much of an impact on her decision to save.

Exempting normal returns, while taxing super-normal returns, is the principle underlying why expensing of capital investment for businesses is such a good idea. It preserves the tax on capital but targets it at a less sensitive tax base.

Unfortunately, a wealth tax does a poor job targeting this type of income. In fact, it gets it exactly backwards: a wealth tax lightly taxes super-normal returns while heavily taxing normal returns.

You can think of a 1 percent wealth tax as a 1 percent subtraction from annual returns. If we earn a return of 5 percent, but there is an annual wealth tax of 1 percent, our return is really 4 percent. This low-return asset is hit hard—a 20 percent(!) tax on its returns. In contrast, an asset earning 20 percent gets reduced to a return of 19 percent. That’s only a 5 percent tax on those returns.

And these issues matter for more than just the wealthy individuals directly impacted by the tax. The capital owned by these high-net-worth individuals is used to employ others, to make products consumed by other individuals, or to generate returns for pensions and retirement accounts owned by others. While the legal incidence of the tax would be on the wealthy individuals, the economic impacts (incidence) would be much more dispersed.

So here’s the thing about wealth taxes — Americans, in general, have been against them. As Steinback remarked:

“Except for the field organizers of strikes, who were pretty tough monkeys and devoted, most of the so-called Communists I met were middle-class, middle-aged people playing a game of dreams. I remember a woman in easy circumstances saying to another even more affluent: ‘After the revolution even we will have more, won’t we, dear?’ Then there was another lover of proletarians who used to raise hell with Sunday picknickers on her property.

“I guess the trouble was that we didn’t have any self-admitted proletarians. Everyone was a temporarily embarrassed capitalist. Maybe the Communists so closely questioned by the investigation committees were a danger to America, but the ones I knew—at least they claimed to be Communists—couldn’t have disrupted a Sunday-school picnic. Besides they were too busy fighting among themselves.”

It seems most of the socialists in America are fairly spoiled children who now find out they have to work in things they may not wish to work in, if they actually want to keep to the lifestyle to which they became accustomed. It’s tough!

And they look around, and see the people who have it made, and they want that other person’s stuff. That’s a child’s attitude. It’s also central to the mortal sin of envy — coveting other people’s stuff, whether it’s their specific physical goods, their potential to amass more goods (aka their wealth), their relationships, etc.

I can see certain problems that come out of income inequality, but simply that somebody has more than another is a problem only to the extent that someone is being sinful.


And those final ones were from yesterday, Jan 28. Right now, Stu has taken apart my Macbook to get at the harddrive, so he can get all our old files off of them. And yes, that’s where my prior year tax files are. So I may be starting late on taxes this year. I usually get them done by mid-February.


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