Weekly Legislative Update - October 7, 2019
Bernie Sanders Calls for 8% Wealth Tax On Richest Americans
(Wall Street Journal)
TIA recently attended a series of meetings in Washington where we became aware of this tax proposal. TIA strongly opposes.
Presidential candidate Bernie Sanders proposed an annual wealth tax topping out at 8% for the richest Americans, offering the farthest-reaching Democratic plan to pay for expanded government programs and break up concentrated fortunes.
Mr. Sanders's plan would hit more households and raise more money than the tax proposed by Sen. Elizabeth Warren of Massachusetts, his chief rival for progressive voters. According to an analysis by economists who consulted with both campaigns, Mr. Sanders's plan would generate $4.35 trillion over a decade, compared with Ms. Warren's $2.75 trillion.
Mr. Sanders's plan would increase federal revenue by about 10%, all from around 180,000 households.
"Enough is enough," Mr. Sanders, a senator from Vermont, said Tuesday. "We are going to take on the billionaire class, substantially reduce wealth inequality in America and stop our democracy from turning into a corrupt oligarchy."
The tax would apply to married couples with net worth of at least $32 million and individuals with net worth of at least $16 million. The rate would start at 1% per year and rise to 8% for married couples with assets of at least $10 billion. That 8% rate would mean that megabillionaires who don't earn at least an 8% return would see their fortunes shrink, and Mr. Sanders said Tuesday that there should be no billionaires.
Mr. Sanders would use the money to pay for his child-care and housing proposals and for part of his health-care plan.
During this election cycle, Democrats have offered more expansive proposals to tax the super-rich than they did in years past. That is in part a reaction to income and wealth disparities, and it is also an attempt to fill what they see as gaps in the income-tax system.
Under the current tax code, increases in wealth aren't taxed as income unless people sell assets and realize gains, which are often taxed at preferential rates. Unrealized gains also escape income taxation when a person dies, though the estate tax may still apply.
But implementing a wealth tax would be challenging, with cascading effects on tax revenue, business ownership and philanthropy.
Such a change would require new rules and procedures for determining wealth each year and additional Internal Revenue Service resources to prevent tax avoidance and tax evasion. The government would have to determine whether the assets of charities controlled by wealthy people would be subject to the tax, and the decision could reshape the nonprofit sector.
The proposals so far don't address how to handle assets in trusts, and Beth Shapiro Kaufman, an estate-tax lawyer at Caplin & Drysdale, said at a conference Tuesday that this would be important.
A wealth tax would also have unknown effects on economic growth. The founders of successful companies would have a harder time holding onto controlling stakes as they grow. Had Mr. Sanders's tax plan been in place since 1982, with all else equal, Amazon.com Inc. CEO Jeff Bezos would have a net worth of $43 billion instead of $160 billion, according to Emmanuel Saez and Gabriel Zucman, the economists at the University of California, Berkeley, who worked on Mr. Sanders's and Ms. Warren's plans.
If it got through Congress, the tax would likely land in the courts. It could be declared unconstitutional because courts could deem it a direct tax that would have to be apportioned among states according to their population. Progressive lawyers are already working on ways to design the tax to address these issues.
To improve enforcement, Mr. Sanders calls for imposing an exit tax of up to 60% on the assets of wealthy people who renounce their U.S. citizenship. He would also expand the IRS to audit at least 30% of people in the lowest wealth-tax bracket and audit all billionaires every year.
To address concerns about valuation of illiquid assets such as privately held businesses, Mr. Sanders would let taxpayers conduct appraisals periodically instead of annually and assume appreciation each year at specified rates.
Analysts have questioned whether wealth taxes would actually raise as much money as the campaigns estimate, both because of tax avoidance and because of disagreements over how much wealth is concentrated at the top of the distribution.
"These wealth taxes raise a lot of money, perhaps not as much as the advocates hope," said Janet Holtzblatt, a senior fellow at the Tax Policy Center, a Washington group run by a former Obama administration official.
TIA strongly opposes this proposal.
What the U.S. Can Learn from the Adoption (and Repeal) of Wealth Taxes in the OECD
Recent discussions of a proposed wealth tax for the United States have included little information about trends in wealth taxation among other developed nations. However, those trends and the current state of wealth taxes in OECD countries can provide context for this new proposal.
The OECD maintains detailed tax revenue statistics going back to 1965 for its 36 member countries. The data includes revenues from taxes on the net wealth of individuals.
According to these data, the number of current OECD members that have collected revenue from net wealth taxes has grown from nine in 1965 to a peak of 14 in 1996 to just four in 2017.
In the OECD data, the countries that collected revenues from net wealth taxes on individuals in 2017 are Switzerland, Spain, France, and Norway. Revenues from net wealth taxes made up 3.62 percent of revenues in Switzerland in 2017 but just 0.55 percent of revenues in Spain. Among those four OECD countries collecting revenues from net wealth taxes, revenues made up just 1.45 percent of total revenues on average in 2017.
In 2018, France dropped its net wealth tax, and Belgium introduced its own version of a net wealth tax.
An OECD report about wealth taxes argues that these taxes can harm risk-taking and entrepreneurship, harming innovation and impacting long-term growth. The report also suggests that a net wealth tax could spur investment and risk-taking. Essentially, the argument is that because a wealth tax would erode the after-tax return for an entrepreneur, that entrepreneur might engage in even riskier ventures to maximize a potential return. However, a wealth tax would be a particularly poor way to encourage risk-taking.
The revenue data from the OECD does not perfectly match the policy changes made by countries. For instance, Austria effectively repealed its net wealth tax in 1994, but revenues from the tax continued to trickle in until 2000. The OECD also conducted a survey of countries regarding their net wealth taxes and the trend for collecting revenues from net wealth taxes is similar to the survey responses.
Additionally, the OECD data definitions leave out two countries that currently administer a net wealth tax, although in unique ways. The Netherlands applies a tax on net wealth as part of its income tax, and Italy has a net wealth tax that applies to assets and property held abroad by Italian taxpayers. Including the Netherlands and Italy, there are six OECD countries that currently administer a net wealth tax on individuals.
Some countries have unique exclusions to their wealth taxes. Italy's net wealth tax has a provision where new Italian residents who relocate to Italy for tax purposes may not be subject to the wealth tax. In Spain, the net wealth tax effectively only applies to taxpayers who do not reside in Madrid, because the city provides 100 percent relief from the tax.
Over the years, countries have repealed their net wealth taxes for various reasons, but economic impact is included in those reasons. French Finance Minister Bruno LeMaire has made it clear that the repeal of the wealth tax in France is part of a reform package designed to "attract more foreign investment." The French reform package also includes a planned reduction in the corporate tax rate.
The lessons from other countries' experiences with wealth taxes should inform policymakers in the U.S. as they consider such a proposal. With so many countries having adopted and then abandoned a wealth tax, perhaps the U.S. should avoid adopting one in the first place.