ProPublica’s bombing report of leaked ultra-rich tax returns drove people insane. Most of all, they seem mad at the rich who have paid little income tax as a fraction of their income and practically nothing as a fraction of their net worth. In some cases, actually nothing. Some billionaires – supposedly the owner of this newspaper too! – Paid zero dollars in income tax for a handful of years.
Everything when her fortune swelled.
Catherine Rampell / Washington Post
Smoke anything you want, but the control system works exactly as it was designed. We have chosen not to tax “unrealized gains” as income – that is, we will only tax the increases in most assets if and when those assets are sold.
And sometimes, not even when those stocks of stocks or gold bars or whatever is passed on to the heirs first.
As a society, we could make different choices. There are a long range of options to wrest more money from the rich, including some great suggestions from President Joe Biden.
Let’s start with options that are popular but somewhat problematic. Many leftists love property taxes such as the one that Senator Elizabeth Warren, D-Mass promoted. While the idea scores very well, its constitutionality is questionable. The Supreme Court has lowered property taxes before; Given the current composition of the court, a different outcome appears unlikely.
There is also the tricky problem of assessing the value of the assets of very rich people each year. With publicly traded securities (like Tesla stock) it’s easy, but with more illiquid assets (a tightly run business, an art collection, intellectual property rights to Taylor Swift’s song catalog) the valuation can be easily tampered with if no recent transaction has taken place.
The introduction of an annual wealth tax should therefore be an enormous obstacle for professional appraisers and leave the Internal Revenue Service far behind.
Similar administrative problems would arise if we were to “mark-to-market” the value of assets annually, another popular idea. It does not tax people’s wealth per se, but rather their capital gains according to the annual growth (or decrease) in their wealth, even if these assets have never been sold.
In addition to valuation challenges, this policy is likely to raise political problems. New research suggests that Americans really dislike the idea of taxing capital gains before a sale as they see it as unfair. And what happens when the wealth of the rich loses value? When there’s a huge recession and Facebook stock tanks, does Uncle Sam Mark Zuckerberg write a check?
So let’s talk about some more promising ideas.
One that Biden has advocated is raising the corporate tax rate. If corporate taxes are paid primarily by shareholders – as economists generally believe – it means that an increase in corporate taxes would effectively increase the tax burden on the Warren Buffetts of the world.
We could also impose a national consumption tax. Right now, billionaires can finance a lavish lifestyle by borrowing at low interest rates on their stock holdings and using that untaxed money to fund things like villas or yachts. A consumption tax would hit such purchases.
However, consumption taxes tend to be regressive, so other policy changes would be needed to keep the poor from being put at risk.
Then there is Biden’s proposal to raise the top tax rate on capital gains and, more importantly, change it when such taxes are triggered.
Right now, rich people can bequeath a huge fortune to their heirs tax-free (up to a certain amount), and any profits their stocks or other assets have made over their lifetime are wiped out at death as if they never happened, at least for tax purposes. However, under Biden’s plan, tax laws would treat gains above a certain threshold as “realized” if the owner dies or otherwise transfers the asset to someone else. In both cases, capital gains taxes are due.
Biden’s scheme would maintain current incentives to hold assets for as long as possible, which introduces some distortions. But this “deferment benefit” could be addressed by essentially charging interest for all the years that a person held stocks before their death, or either selling them or giving them away. This idea, sometimes referred to as the retrospective capital tax, was proposed by Nobel Prize winner William Vickrey around 80 years ago and has been developed since then.
Such changes would go a long way towards ensuring that those who live on their wealth pay their “fair share”, just as normal wage earners do. They would not guarantee that every billionaire’s fortune will be taxed, especially if we are unwilling to abolish tax breaks for charity. There are other ways for the wealthy to legally evade the helmsman. For this reason, it would be helpful to add a few different policy changes if the goal is to get the richest Americans into pony rides.
“Tax law is a kind of Swiss cheese,” says Daniel Hemel, professor of tax law at the University of Chicago. “So let’s add a few more layers of cheese.”