Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


America needs a Wealth Tax

The United States needs a wealth tax because our government cannot tax enormous amounts of money.

To explain, the federal government relies upon income taxes for most of its revenue. Income taxes only apply to money people earn from jobs or investments.

Consequently, a billionaire who has no job but has a $10 billion stock portfolio and $5 billion worth of art and real estate may not pay federal taxes on that wealth. Dramatically, under our perverse tax system, a waitress has to pay federal taxes on her tips, while a billionaire does not have to pay a federal tax on his yacht, his private jet, or his Picasso.

This means federal tax collectors cannot touch most of the $4.7 trillion America’s billionaires have accumulated. Nor can the federal government get most of the $1.8 trillion, estimates US billionaires raked in during the COVID-19 crisis.

What is a Wealth Tax?

A wealth tax is a tax on wealth in any form, liquid or physical. I think we need a wealth tax because wealth takes many forms in today’s world.

Wealth can be cash, real estate, stocks, bonds, intellectual property such as copyrights or patents, cryptocurrency, art, or collectibles. The federal government does not tax many of those things. Yes, there is a capital gains tax, but you only pay a capital gains tax when you sell an asset. As long as you hold the asset, wealth is exempt from federal taxes.

Thus, when a billionaire spends his money on $100 million artworks, $1 million comic books, and $500,000 Ferraris, he is avoiding taxes. After the rich pay the sales tax, money spent on those items is effectively tax exempt.

Hence, conspicuous consumption such as Oracle (ORCL) founder Larry Ellison’s $300 million yacht is not mindless waste. Instead, the conspicuous consumption is a clever tax evasion strategy. Ellison spent $300 million on a yacht to exempt that $300 million from taxes.

Tax Evasion through Luxury

Another reason Ellison sunk $300 million into a yacht is that he can borrow against the yacht. Hence, Ellison gives himself additional tax-free spending power by buying a “luxury.”

Many wealthy people pay all their bills and make most purchases by borrowing against stocks, art, real estate, and other assets. Hence, the rich grow richer while keeping most of their money. Instead of conspicuous consumption, luxury becomes a rational financial decision.

Under an intelligent wealth tax, Ellison would have to pay taxes on the $300 million he sunk into the yacht. Under America’s system, Ellison gives himself a $300 million tax deduction by buying a yacht. If the yacht’s value grows, Ellison gains untaxed wealth.

Strangely, a wealth tax could lower costs for ordinary people. To elaborate, prices for many assets, including art and real estate, are high because the wealthy buy those things as a tax dodge. Eliminate the tax benefits to land, houses, and art and the prices could fall along with the demand.

Is a Wealth Tax Constitutional?

Okay, a federal wealth tax sounds logical. So why doesn’t why America have one?

After all, local governments tax wealth in the form of real estate and some states levy taxes on expensive vehicles as registration fees. Congress, however, refuses to touch the wealth tax issue because nobody knows if it is Constitutional. Some legal scholars argue that the Constitution restricts direct taxes by requiring direct taxes to be apportioned by state.

To explain, the US Supreme Court declared income taxes unconstitutional in an 1895 case called Pollock v. Farmers Loan and Trust Company. That tax necessitated the 16th Amendment, which exempts income taxes from the apportionment requirement.

Under the apportionment requirement, the amount of federal tax a state pays must reflect its percentage of the national population. Hence, wealthier states will not pay a disproportionate amount of the national tax burden.

Constitutional scholars think wealthy Virginia slave owner James Madison wrote apportionment into the Constitution to keep the federal government from taxing slaves. Madison’s fear was that more populous northern states could view slaves, the nation’s biggest accumulation of personal wealth in the 18th Century as a source of tax revenue.

However, in an earlier case, the US Supreme Court upheld a federal tax on wealth in the form of carriages. President George Washington (I-Virginia) proposed and signed a federal tax on carriages because he thought carriages were a sign of wealth.

A carriage was the 18th Century equivalent of a Ferrari, only the wealthy could afford to own and operate one. For more details, listen to this NPR Planet Money episode.

Today’s legal scholars cannot agree on which court ruling applies to the wealth tax. Moreover, the US Supreme Court has not ruled on a wealth tax in a long time.

Hence, nobody knows if a wealth tax is Constitutional. Historically, the US Supreme Court has had a habit of discovering new legal interpretations that conform to popular opinion. Hence, the Harris-X Poll that shows 74% of registered voters support a 2% wealth tax could convince the Supremes that such a levy is “Constitutional.”

Unfortunately, if the US Supreme Court declares a wealth tax unconstitutional; or refuses to rule on the matter, it could necessitate a Constitutional Amendment. The 16th Amendment shows such an amendment is possible, but passing one is tough.

The Constitution requires a vote of two-thirds of state legislatures to pass amendments or call a Constitutional Convention to amend the Constitution. However, popular sentiment can force politicians can force politicians to act, as the 1913 ratification of the 16th Amendment demonstrates.

What Should a Wealth Tax Look Like?

My suggestion is for a progressive wealth tax on wealth over a specific amount.

I propose an annual wealth tax on all individual wealth in any form of over $5 million in value. Hence, most people, including most rich people, will be exempt from the wealth tax. Multimillionaires and billionaires, however, will pay.

Here’s how I think it could work:

The first $5 million in individual wealth will be exempt from the wealth tax. Any wealth over $5 million will be subject to a 5% annual wealth tax. That means the citizen pays a 5% tax on that wealth every year.

The wealth tax will go up to 10% at $50 million. That means the Treasury will tax individual wealth worth $50 million to $100 million at a rate of 10% each year.

At $100 million, the wealth tax rises to 25%. That means individual the tax rate on wealth worth between $100 million and $500 million will be 25% a year.

At $500 million, the wealth tax rises to 50%. That means the Treasury will tax wealth worth $500 million to $1 billion, a rate of 50% a year. At $1 billion, the wealth tax rises to 75%. That means individual fortunes over $1 billion will pay a rate of 75% a year.

Under this system, $1.35 trillion of the $1.8 trillion wealth claims America’s billionaires accumulated during the pandemic could have gone to the federal treasury. You shouldn’t feel too bad for the billionaires their fortunes would have still grown by $450 million.

Additionally, I think we need a new organization separate from the Internal Revenue Service to collect the wealth tax. Perhaps a Wealth Tax Agency?

I think a wealth tax is inevitable in America. However, enacting one could require a fierce battle.