Practicalities of a Wealth Tax

5/15/20

My recent posting arguing in favor of instituting a wealth tax struck a nerve. (See https://medium.com/@igkawaller/justifying-a-wealth-tax-9b2dbb2cb9c0.) Although I’m dealing with a small sample of respondents, the common thread challenged the feasibility of a wealth tax, contending that there are inherent ambiguities as to what should be included and, regardless, measuring wealth is difficult.

If you judge it to be a worthy goal, those considerations can be addressed. Here are broad outlines that, while imperfect, would serve as a starting point:

· Valuations for financial assets, captured by brokerage statements.

· Valuations for private companies, based on Owners Equity shown on company balance sheets. measures of for private companies.

· Home values would necessarily be estimates, but red flags should be easy to implement for audit purposes, given zip code information.

· Property that’s income generating should be easy to identify, and while values for these assets could be somewhat subjective, knowing the related income allows for additional red flagging.

I expect that the biggest measurement problem area deals with collectables. I don’t have a particularly effective or efficient way to deal with this wealth category, but unless a better idea comes up, I’d be willing to rely on an honor system. I’m just not all that worried about undercounting wealth in this area if that’s the holdup in moving forward on a wealth tax. In any case, while some might be predisposed to sheltering their wealth by converting it into collectibles, it’s far from clear whether the savings on taxes would justify the price exposure inherent in the strategy. As an asset class, collectibles are dicey, at best.

Admittedly, this approach is neither perfect nor all inclusive. Moreover, and a certain amount of manipulation and/or outright deceit should likely be expected, but some level of oversight should keep those shenanigans to an acceptable level.

The second element of concern mentioned in my prior posting was that a wealth tax could induce a flight of capital with wealthy individuals leaving the US — and to that I said, “good riddance.” I was amazed that responders to my post unilaterally agreed. Given that attitude, maybe a wealth tax isn’t as out of reach as many might think.

A final caveat: Some have categorized the notion of a wealth tax as class warfare or “soaking the rich.” Hardly. Imposition of this tax would dramatically change the composition of who bears the incidence of the tax burden without changing the lifestyles or spending habits of those directly impacted by this tax one iota. That combination of outcomes as close to an ideal as we’re ever likely to get.

Kawaller holds a Ph.D. in economics from Purdue University.