Massachusetts Senator Elizabeth Warren has suggested the implementation of a “Wealth Tax”. Many people are wondering what that means, and whether such a plan is a good idea. Here is some information about the issue as well as a few notes about our take on this approach.
Benjamin Franklin famously said that nothing in this life is certain but death and taxes. He was not wrong. Paying taxes is the unavoidable price of living in a civilized society. Federal taxes pay for our military protection, our transportation infrastructure, safeguards for our water and food supplies, for education, research, disease prevention, and many other things. State and local taxes are used to pay for education, police, fire, and local government administration and a long list of other services.
The current income tax system takes some of the money we gain through work, and this is the main way our federal, state and local governments gain the funding they need in order to provide these services. Anyone creating earnings through work is subject to this tax. However, very wealthy people generate income by other means, and Senator Warren proposes to tax those other means.
A “Wealth Tax” is intended to take some money from the rich in order to provide more services
and support for the poor and to some extent for the middle class, which includes most of us.
Under Senator Warren’s plan, a 2% annual tax would be imposed on taxpayers possessing more than $50 million in assets, which are not currently taxed unless they are sold or otherwise transformed. There are currently about 75,000 families in the US who would be subject to this tax, out of roughly 130 million taxpayers in our country of about 330 million people. Senato Warren’s plan would include levies on things like mansions, jets, yachts, artwork, jewelry and other items of value. The idea behind this is that the very wealthy people should help to make our country a better place by supporting the less wealthy people.
Is this a good idea? Well, there are a few things to consider:
- Is it fair?
- Will it help?
- Can it be done?
Is it fair? Some rich people earned their wealth through hard work while others inherited it or
gained it through luck, so it’s hard to say whether it’s fair to tax people on wealth they have
accumulated. It clearly is fair to ask that those people who have benefited from government
investments in defense, transportation, education, medicine, science and other fields to help pay for those benefits and to pass them on to others. However, it is very difficult to determine the appropriate amount of support for the public good that should be asked of those who have benefited from those public investments.
Will it help? Since Senator Warren’s announcement, there has been a persistent claim that this has never been tried before. In fact, it is quite an old idea. The OECD (Organization for Economic Co-operation and Development, of which the USA is a member) has been around since 1961, and 19 of its 36 member countries had wealth taxes then. Only four do now. Why? Because it is difficult to determine the value of long-term assets (like artwork or jewelry or collectibles) and more difficult still to ensure that all such assets are reported. Also, the value of these assets can fluctuate widely over time.
Can it be done? Probably not. Jewels, artwork, collectibles and other assets are easily hidden and it is easy to imagine that a favorable valuation of such objects could easily be bought in a corrupt market. Also, even assets like jets and ships can vary widely in value, so it is hard to know what they are worth at any point in time. (In addition, unlike jewelry and most artwork, things like jets and ships are often used to generate income through their use, and so they are capital assets that are subject to different rules.)
In our view, the “Wealth Tax” idea is well-intentioned, but impractical. Here are a few ideas that might further the ideals of fairness in taxation as we struggle to provide a level playing field for all taxpayers:
1) A living wage – Provide enough money for each full-time (40 hours per week) worker so that he or she can afford a roof overhead. In 1960 dollars, the current minimum wage of $7.25 has only half the buying power $1.00 did then. In 1960, it was possible (but not comfortable) to maintain a household of four with one full-time worker. The current federal minimum wage provides only about half of that buying power. In 2019, it now takes two full-time workers at that rate to provide slightly less than the same support. Add child care and the house of cards collapses. (As an example, a store clerk in 1960 earning minimum wage could typically afford rent, modest groceries and bus fare or other transportation for a family of four, but was by no means living a middle-class lifestyle. That same clerk today can’t afford rent, transportation and food of the same type without help. Usually that means two wage-earners who often struggle with child-care in addition to their full-time jobs. Clearly, the two-earner households deserve our support!)
2) Health-care – Eliminate fears of health-related bankruptcy among those least able to endure it by extending Medicare to everyone. The US is the only major industrialized country that does not provide some form of guaranteed health care. This is not socialism. It is simple care for the citizenry, and a reward for patriotic citizenship.
3) Repair Social Security – Secure the promise of at least subsistence income for the elderly. Eliminate the earnings cap on the social security formula so that the very wealthy pay the same rate on earned income that workers do. At this point, it may also be necessary to raise the current 6.25% rate. An increase of 1% would extend the solvency of the Social Security trust fund for decades.
4) Equalize income tax rates by source – Income taxes are primarily collected on earned income, which comes from productive work like wages and salaries. The very wealthy do not generally earn most of their income through work, but rather through, for example, capital gains. These arise with stock and bond sales and sales of other assets. The current capital gains rates are far below those for earned income, and benefit the wealthiest among us to an extraordinary degree. For example, a hard-working plumber or electrician with a few employees earning $300,000 will pay a marginal income tax rate of 37% on the federal level, while a passive investor may pay 15% or less for the same level of income.
These four ideas all preserve the existing and continuing wealth accumulation of the wealthiest among us, while also providing more humane and significant support for the rest of us. Senator Warren may not have a practical idea in her “Wealth Tax”, but her intention to provide more equal access to housing, health care and education is admirable and worth pursuing!
This topic is somewhat removed from our usual focus on keeping engineering and manufacturing jobs here, but it is related. We at TCA have no political agenda, and we have supported both political parties in the past. Our view is simply that we are all in this together! If we are to succeed and persist as the greatest nation on earth, we must provide for even the least among us. We must also care for the most privileged, who possess and direct the capital on which our system depends.
Taxes are what we pay for government. Government is a necessary institution to help us all get access to defense, transportation, education, communication and a great many other things that the “free market” would not provide if everyone had to pay for everything in individual transactions all the time. The function of government requires our participation, with actions, money or both. That said, some people will always try to “game” the system. It takes only a few people with malicious or simply selfish intent to ruin the circumstances for the great many of the rest of us. We should therefore recognize that there will always be some rotten apples, but that most of us are good. We must vote whenever possible, and choose our government carefully. Also, we should support the government we have chosen, even when it is different from the government we voted for, and work to make the change we seek.
Again, Tax Credit Advisor LLC takes no specific political positions. We support individual liberty for all, and require individual responsibility for all who would have our respect, and do not support a welfare state. However, we believe strongly that America – and the world! – should be a place where hard work, compassion and kindness are rewarded.
As always, we are here to field your questions and to help in any way we can. Please call or write to us if we can be of any help!