Should We Implement a Wealth Tax?
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KEY SOURCES
Federal Reserve - Survey of Consumer Finances
Brookings Institution
Open Letter to 2020 Presidential Candidates
UC Berkeley
Cato Institute
Tax Foundation
Mankiwn: PIIE
OECD Tax Policy Studies
National Bureau of Economic Research
Tax Policy Center
American Enterprise Institute
Foundation for Economic Education
WHY THIS QUESTION MATTERS:
According to the Federal Reserve, income and wealth inequality in the United States is on the rise. This fact has been highlighted by several 2020 presidential candidates, who believe that wealth is too highly concentrated at the top. One proposal to redistribute wealth from the top earners is a wealth tax (there are currently several versions of this tax being suggested). While most taxes hit a flow of money (like when you earn money via an income tax or when you buy a product via a sales tax), a wealth tax hits stagnant money, such as business assets, personal belongings, etc.
This article explores the pros and cons of the Wealth Tax -- which would tax the wealth of individuals whose net wealth totals $50 million or more. The proposal has become particularly newsworthy as 2020 presidential candidates have openly debated the policy with several billionaires including Bill Gates and Mark Cuban.
WHY PEOPLE ARE TALKING:
As income and wealth inequality rise, so too does its prominence in political discussions. According to a Politico-Morning Consult Poll, 54% of Americans “strongly agree” that the wealthiest individuals should pay higher taxes. According to a Federal Reserve Survey, “families at the top of the income distribution saw larger gains in income between 2013 and 2016 than other families, consistent with widening income inequality.”
This trend has led prominent government officials and various 2020 Presidential Candidates to recommend policies to curb wealth at the top income brackets. Some recommend increasing corporate taxes, others recommend increasing progressivity of existing income taxes, closing loopholes, increasing estate taxes, implementing a wealth tax or some combination of all proposals. The remainder of this article will specifically focus on the Wealth Tax.
WHAT IS A WEALTH TAX?
A wealth tax is most similar to a property tax, except instead of taxing property ownership exclusively, a wealth tax would be a tax on all assets. This includes personal belonging (i.e. clothes, jewelry, cars), business assets (i.e. Jeff Bezos’ interest in Amazon), investments (i.e. money that millionaires put into other companies), and may include foundations (i.e. the Bill and Melinda Gates foundation).
The wealth tax is considered an aggressive plan and has been a topic of hot debate not only between politicians and business leaders, but also amongst economists. Reuters describes the rise of the Wealth Tax idea during the Oct. 2019 Democratic debate, in which “several of the other 10 candidates on the stage reject[ed] it as too radical.” However, the concept still enjoys support amongst those who see it as a solution for the “rich getting richer.”
What do you think?
The COMMON THREAD:
Both sides believe that the tax system should be equitable and promote growth.
FIND YOUR THREAD:
Supporters of the wealth tax say it will promote a redistribution of wealth to those who need it most. Opponents of the proposal say it will be challenging to implement and will ultimately hurt economic growth and job creation.
Yes, We Should Implement a Wealth Tax.
Reason 01
A wealth tax would help reduce wealth inequality, which is at historically high levels.
The “share of income and wealth held by affluent families have reached historically high levels” -- -- the top 1% of families own a greater share of the nation's wealth (38.6%) than the bottom 90% of families combined (22.8%). Federal Reserve - Survey of Consumer Finances
Typical income taxes are not an effective way to tax the ultra-wealthy as they earn most of their money via investments and other means. For the top 400 wealthiest families, only 45% of their total income is reported and taxed as traditional income. The remainder (investments, etc.) is not taxed or is taxed at a lower rate. Brookings Institution
Some self-made and inherited billionaires have called for a wealth tax. A group of nineteen billionaires and multi-millionaires signed an open letter supporting the wealth tax as a “moral, ethical, and economic responsibility” to improve the economy, health outcomes, and democratic freedoms. Open Letter to 2020 Presidential Candidates
If a wealth tax existed, it would effectively double the tax rate on the wealthiest 400 families from 23% to 46%, which would reduce wealth inequality. Brookings Institution
Reason 02
A wealth tax will increase tax revenue to the federal government and allow funds to be redistributed.
A study from UC Berkeley suggests that a wealth tax could raise $2.75 trillion in tax revenues over a ten-year period. This tax revenue could be redistributed to lower income individuals and promote greater wealth equality. UC Berkeley & Brookings Institution
Critics of the wealth tax argue that similar taxes have been largely ineffective in Europe due to tax evasion. However, the U.S. could avoid these issues by establishing penalties for evasion tactics such as offshoring and renouncing citizenship to make it more effective. Brookings Institution
Reason 03
A wealth tax would create a more level playing field for smaller players in politics and business.
Accumulation of massive wealth may influence the political process via lobbying and campaign financing. Brookings Institution
Massive wealth may also dampen business competition as wealthy individuals have more resources to block competitors. If the rich have to pay a percentage of their wealth in taxes each year, it makes it harder for them to maintain or grow their wealth. Brookings Institution
No, We Should Not Implement a Wealth Tax.
Reason 01
A wealth tax punishes success and will hurt the economy by discouraging business investments.
Roughly 80% of millionaires in the U.S. earned their wealth instead of inheriting it. A wealth tax unfairly punishes success of individuals who, on average, work more hours than lower-wage earners. Cato Institute
The tax system is already progressive. In 2016, the top 50 percent of all taxpayers paid 97 percent of all individual income taxes, while the bottom 50 percent paid the remaining 3 percent. Tax Foundation
Most billionaires do not put their money under the mattress. They invest it in companies, non-profits, etc. A wealth tax could require a newly successful entrepreneur to liquidate part of her business or to divert assets from investments. Charities (like the Bill and Melinda Gates Foundation) may also be taxed. Foundation for Economic Education
A wealth tax also encourages millionaires to spend instead of saving and investing -- “consider two high-flying professionals with comparable incomes but different lifestyles. Why should the one who saves and invests be taxed more than the one who uses a private jet to go skiing?” Mankiwn: PIIE
Reason 02
We should learn from Europe that a wealth tax will likely miss its main objective of raising more tax revenue.
While 12 European countries had wealth taxes in 1990, just four do today. Revenue from European wealth taxes did not increase over time despite significant wealth growth. This is because (1) a wealth tax is difficult to administer, (2) the wealthy choose to leave the country (capital flight), or (3) the wealthy find other means to evade taxation. OECD Tax Policy Studies
A recent study demonstrated that a wealth tax is easy to avoid. In Switzerland, which has the highest tax rate, top earning Swiss families appear less wealthy as they’ve found ways to hide wealth in response to high taxes. A 1% wealth tax lowers reported wealth by 34.5%. National Bureau of Economic Research
Reason 03
A wealth tax may be deemed unconstitutional and be an ineffective means to curb wealthy individual’s influence.
A wealth tax will likely be challenged as unconstitutional according to Article I, Section 9, which creates restraints on “direct taxes” levied by the federal government. American Enterprise Institute
If we are concerned with the political influence of wealthy individuals -- we should strengthen campaign finance laws, not cap wealth potential. A wealth tax may actually encourage more political donations as a means for the rich to evade taxation. Tax Policy Center
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