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The Problems With Wealth Tax: Why It Just Doesn’t Work

27 Feb
tax bill for 2020

The Problems With Wealth Tax: Why It Just Doesn’t Work

What’s This About A U.S. Wealth Tax?

It’s that time of year again…

It’s tax season.

Thankfully, no big changes for U.S. tax filers this year.

However, one big potential tax change is being discussed among the Democratic presidential nominees—a wealth tax.

Each presidential hopeful suggesting the United States begin taxing its “wealthy” has his or her own ideas about how this should work. The particulars don’t really matter.

No wealth tax in any form would have the effect the candidates expect and project. No matter what incarnation were passed, it simply would not do what the math-impaired candidates want it to do.

Maybe they don’t care that a wealth tax wouldn’t solve the problems they say it would solve because that’s not really the point. The point is good sound bites.

Meantime, the evidence is great that their thinking is wrong. Many other countries have implemented a wealth tax… and almost every one has eventually rescinded it.

How The Wealthy Avoid Paying Wealth Tax

Why? Wealthy people are generally much more mobile than poor people.

France saw an exodus of high earners from this country when it implemented a new top marginal tax band of 75% for earnings over 1 million euro.

The tax wouldn’t have affected more than a few thousand French tax payers, but it made for good headlines for the government. But the reality was less PR-worthy.

The first year after the new tax was instituted, taxes collected in France were almost 50% lower than the government had projected they would be thanks to the new rules. And it wasn’t only individual income tax collections that were below projections. Corporate taxes and VAT missed the mark, as well.

Maybe the 75% tax band wasn’t to blame for the entire shortfall, but it was obvious that it had been a mistake. When the big earners take their earnings elsewhere (as they typically can easily do), the consequences have long tails.

France repealed its wealth tax after only a couple of years.

More recently, Macron adjusted France’s approach to its wealth tax again. Now it applies only to real estate. Previously, it was based on all assets of a French taxpayer, including real estate but also things like horses and artwork. Many wealthy French left the country… or hid their artwork. So now Macron says, ok, fair enough. We’ll only charge the wealth tax on property assets.

The tax kicks in at 1.3 million euro of real estate wealth. If the property you hold has a total value of less than 1.3 million euro, you’re exempt.

Potential Democratic presidential nominee Elizabeth Warren wants to tax wealth above US$50 million, while Bernie Sanders intends to impose a tax on any individual with US$16 million of wealth or more. I can’t help but notice that those figures mean Warren’s estimated US$12 million of net worth and Sanders’ estimated US$3 million of assets wouldn’t qualify either of them in either case.

Which gets to one of my personal problems with a wealth tax. Who gets to decide what level of “wealth” should be liable for it?

The candidates suggest that an estimated additional US$200 billion of additional tax revenue would be generated a year. I suggest they study the math on France’s wealth tax experiments. And I predict that, should such a tax ever be passed in the United States, the only real consequence will be that the wealthy will leave the United States and take their wealth with them.

Some 83,000 U.S. households are estimated to have a net worth of US$50 million or more. I figure many or most of those households represent business owners. How many jobs have those people created? How much of their net worth is tied up in businesses and investments that would have to be liquidated to pay the wealth tax… meaning the elimination of jobs.

Speaking as one small business owner, I can tell you that options for places to base your business where its earnings will be respected rather than attacked become more important the bigger the business grows.

Lief Simon