A Wealth Tax

What is it?

A wealth tax is a property tax that includes more than real estate. It takes into account the ownership of shares of businesses; works of art; vehicles like cars, boats/ships/yachts, planes; money and other financial assets (excluding retirement accounts); cash, foreign currencies, and cryptocurrencies; precious metals, jewelry, and other commodities; and, of course, real estate.

For Liberals:
It's like a "sin tax" that normally hits things like alcohol and tobacco, but instead hits the most extreme wealth holdings that contribute most to inequality. Taking such revenues to fund government assistance programs or funding income inequality relief (universal basic income, negative income tax, etc.) will greatly increase the progressiveness of the tax structures we have in place. This tax taken individually would lower wealth inequality on its own and any government support programs funded by such a tax would increase progressiveness further.

For Conservatives:
It's a property tax that includes more than just real estate. Any agricultural land that would be taxed by this would be owned as part of a massive factory farm and not part of normal family farms. The flow of money around the economy is what creates jobs and the assets being taxed are not cash flowing through the economy, so job creation will be unaffected.

What have we seen?

Senator Elizabeth Warren, when she was running for President, proposed a wealth tax, which looked something like this:
  • $0 - 50 Million: 0%
  • $50 Million - 1 Billion: 2%
  • $1 Billion+: 3%
This tax setup was originally expected to bring in $2.75 Trillion over the next decade. To help pay for her Medicare for All implementation, she also proposed a $1 Trillion revenue-raising increase to the top wealth tax bracket:
  • $1 Billion+: +3%, or
  • $1 Billion+: 6% (total)
Such an increase would make the total wealth tax brackets look like this:
  • $0 - 50 Million: 0%
  • $50 Million - 1 Billion: 2%
  • $1 Billion+: 6%

Reverse Engineering

This allows us to do something: calculate a new wealth tax. If the revenues from the 3% increase above $1 Billion in wealth pulls in roughly $1 Trillion, then the original 3% above $1 Billion would be raising that much, too. Subtracting that equal $1 Trillion from the original $2.75 Trillion revenue projection would leave $1.75 Trillion, which would be the amount attributed to the 2% bracket. Dividing that amount by 2(%) gives us $875 Billion in revenue per percent tax levied from $50 Million to $1 Billion in wealth. A similar process could be conducted for the $1 Trillion and 3(%), which gives us $333 Billion in revenue per percent tax levied above $1 Billion. Combined, each percent of a wealth tax gives us $1.208 Trillion when levied on wealth above $50 Million.

The optimal wealth tax rate (pg. 44) is estimated to be 6.25% in 2019. This is found by using the formula (100/[1 + n])% where n is the average number of years that billionaires in the United States have been billionaires. In 2019, that number of years was 15; in 2021 (the year when the next Congress is sworn in) the number would be 17, which would slot into the formula like so: (100/[1 + 17])% or 5.5555...%. Using this percentage to calculate the revenue using the above-calculated numbers gives us this:
  • $0 - 50 Million: 0%
  • $50 Million+: 5.56%
  • Tax Revenues over the next decade: $6.711 Trillion

Revenue Outlook

According to modeling by the Wharton Business school, using the Penn Wharton Budget Model, Warren's wealth tax would only bring in $2.7 Trillion in revenue, or 72% of the full projected revenues. Using this 72% scaling, we'd see a worst-case scenario revenue projection of $4.832 Trillion over the next decade.

Senator Bernard Sanders has also proposed a wealth tax which is expected to raise $4.35 Trillion over the next decade. According to modeling by the Wharton Business school, using the Penn Wharton Budget Model, Sanders's wealth tax would only bring in $3.3 Trillion in revenue, or 75.862% of the full projected revenues. Using this 75.862% scaling, we'd see a middle ground scenario of $5.091 Trillion over the next decade.

Following the pattern and subtracting $1 Trillion from the final result, the wealth tax would bring in $5.7 Trillion in revenue or 85% of the ideal revenue. These numbers give us these revenue projections for the next decade:

  • Low End: $4.832 Trillion
  • Middle Ground: $5.091 Trillion
  • Higher End: $5.7 Trillion
  • Ideal Scenario: $6.711 Trillion

Implementation

Some will complain about apportionment and constitutionality. Historical precedent does exist for using apportionment in implementing this sort of tax, like the property tax levied by the Revenue Act of 1861. For those that have been fortunate enough to not need to know how direct taxation apportionment works, we'll go through an example here: Iowa has roughly 1% of the total US population and California has roughly 12% of the total US population. As of 2016, Iowa has 1 billionaire and California has 124. Even though California has 124 times as many billionaires, the tax burden on California would be 12 times the tax burden of Iowa because California has 12 times the population of Iowa.

To avoid all of this, such a tax could be applied against income as an increase to the Alternative Minimum Tax for people with greater than $50 Million in reported wealth. Such wealth is normally reported for Inheritance Tax purposes. People with large amounts of assets often have ongoing and passive streams of income from their holdings, such as dividends and maturing bonds, so taxes against income will often suffice for an implementation of such a tax. If a person is receiving no dividends or other income in an attempt to avoid paying the wealth tax, then two options exist for enforcing such a tax: having a universal basic income with required acceptance and reporting and having mark-to-market taxation of capital gains.

A universal basic income can come in many forms, but is always in the form of cash paid out from a central figure, namely a national government, most often from tax revenues. So far, no universal income plans exist as active policy, but they could be used to eliminate poverty and reduce income inequality by disbursing progressive tax revenues in such a way that would most greatly benefit people with lower incomes. Having wealth tax revenues fund a basic income program would increase progressiveness for such an income program. Having a universal basic income be required for people to accept would mean that all people have a form of income and having the universal basic income be reported to the IRS, even if too small to be taxed or specially exempt from taxation, would allow the IRS to enforce the wealth tax as an increase in income taxes on the wealthy.

Mark-to-market taxation would treat increases in capital gains (like stock holdings or real estate, for example) like increases in income. This does a number of things, including having a pseudo-wealth tax effect by taxing the increases in wealth holdings annually. Nonetheless, it would virtually guarantee an income tax burden that wealthy people would need to pay to the IRS, which would help with administering the wealth tax as an addition to the income tax.

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