A Wealth Tax

I have been thinking about a Wealth Tax for a few years now.  Indeed, I think about it so often that I imagined that I had already written a blog post about it.  I checked and I had not!  So, here it is. 

I got kicked in the head when I learned, just a few months ago, that Senator (and recently declared candidate for President from the Democratic Party) Elizabeth Warren was proposing a wealth tax.  All of a sudden, my idea was not original, Warren had beat me to the punch.  Not so!  Her idea was a surcharge on the wealthiest men in the land, while my Wealth Tax replaces the federal Income Tax and the federal Capital Gains Tax altogether.  No more taxation of incomes and no more tax on capital gains!  Got that?

The seed for my idea was my realization that the wealthiest and most successful among us had ways to avoid paying income tax.  A ridiculously large part of a rich man’s wealth are his holdings of stocks and bonds and art treasures and perhaps gold and other precious metals – his assets.  As long as he doesn’t sell any – which would generate capital gains income – he pays no tax on his wealth as it is just sitting there without generating any income.  But all the while increasing in value!   Indeed, one of the motives for selling anything is to reduce his taxable income by selling an asset that has lost value since he purchased it.  But as long as he just holds onto his assets, and does not convert them to cash, there is no income to tax.  We can't know – because individual income tax returns are private – what Jeff Bezos, Bill Gates, George Soros, and Charles Koch declare as their "taxable income," but it need not be more than $0.25 as they don't need an income to live on.

Wealth is much cooler than income! 

In addition, some tax payers are taxed at too high a rate when their income is not steady year to year.  For example, many authors publish only a few books in a decade, and some artists experience brilliant years of productivity surrounded by barren years.  So, some years are fat, but most are lean.  High taxes in fat years and low taxes in lean ones.  But someone whose earnings happen in a bunch pays taxes at a much higher bracket than if his income were spread out evenly over the years.  And last, many low-wage Americans are now income tax free due to Trump’s Tax Cut.  They may think this is a good idea, but it plays into Mitch Romney’s nasty remark about the 47% of Americans who feel entitled and who pay no income tax.  Everyone should have ownership in contributing tax revenues for the things that all Americans want (like war, Social Security, paved roads and education). 

Before getting into details, my Wealth Tax would cost the poorest 50% of Americans some federal taxes where before they paid little to none.  And it would surely cause the wealthiest among us to pay considerable taxes where before their effective tax rate was lower than yours!   It would cost them dearly but not so dearly that they would want to flee the country (who really knows how greedy a few of them may be?).  It would be designed so that working class folks would pay less than they had before and so that the top 10% or 15% would pay more than they had before.  Its real reason for being would be ample tax revenues from the ridiculously wealthy who would now begin to pay down the National Debt that two generations of their far-too-low taxes created in the first place. 

This Wealth Tax would NOT be a flat rate, it would be “progressive” or “graduated.”  The wealthier you are, the higher your marginal tax rates.  The same as the federal income tax has always been designed. 

This Wealth Tax would tax every penny of wealth from penny #1 but would do so at such a low level that few could complain with justice.  The wealth tax rate at the bottom would be 1%.  The next bracket would be from $25,000 to $100,000 and its tax rate would be 2%. 3% for wealth from $100,000 to $1,000,000. 4% from $1,000,000 to $10,000,000. 5% from $10,000,000 to $100,000,000. 6% from $100,000,000 to $1 billion.  And, finally, 7% for all wealth above $1 billion.  As I am not an actuary, I must admit that I pulled these brackets and tax rates out of my nether cheeks; actuaries must work on the brackets and rates to achieve the “tax fairness” result that I outlined above, and the added result of achieving meaningful budget surpluses in fat times and manageable deficits in lean times.  In other words, over time the objective is to collect enough tax revenues to pay down the National Debt, and to be able to stimulate the economy to mitigate inevitable recessions. 

While my tax brackets and tax rates are total inventions, they are a good place for actuaries to begin plugging their actuarial models; I want my numbers to achieve my desired results without unduly burdening anyone. 

The federal Income Tax was not constitutionally legal until 1913 when the 16th amendment to the U.S. Constitution was ratified.  Even though Income Taxes were levied prior to that date particularly during the Civil War (war always costs money!).  All of which is a strong indication that this Wealth Tax would require ratification of a new Constitutional Amendment, a huge challenge.

Click the graphic above, the first graphic on the page is interactive.

I can imagine attending the first day of Actuarial Modelling class and being asked by the professor to model this idea.  Here is my contribution: 

Bracket Bottom	Bracket Top	Tax Rate for Bracket	# in this Bracket	Average Wealth	Bracket Revenue
$1	$25,000	1%	200,000,000	$17,500	$35,000,000,000
$25,000	$100,000	2%	120,000,000	$65,000	$156,000,000,000
$100,000	$1,000,000	3%	50,000,000	$320,000	$480,000,000,000
$1,000,000	$10,000,000	4%	11,000,000	$3,200,000	$1,408,000,000,000
$10,000,000	$100,000,000	5%	420,000	$32,000,000	$672,000,000,000
$100,000,000	$1,000,000,000	6%	16,000	$320,000,000	$307,200,000,000
$1,000,000,000	$10,000,000,000	7%	607	$5,125,000,000	$217,761,250,000
$10,000,000,000	all the way	8%	132	$25,000,000,000	$264,000,000,000
Total					$3,539,961,250,000

The first three columns are the numbers that I used in the paragraphs above.  The next two columns are best guesses.  The last column is the product of the previous two columns.   I am SURE these numbers (columns 4 & 5) are far from accurate, as I cannot find a source for “# (of American households) in this Bracket” (the bold typeface means I was able to source that number).   But they are a starting point.  Better numbers will force me to change my bracket and tax rate assumptions, or to abandon the idea altogether.   If you know a good source for these numbers, please contact me. 

May the controversy begin!