Would a “Wealth Tax” Work?
Facing a national debt of over $31 trillion, the Biden administration’s FY 2024 budget plan is looking for a gusher of new revenue in a “wealth tax” of 25% on wealth exceeding $100 million. This would tax not just personal income but gains in the value of assets, regardless of whether that gain actually arrives as cash in hand.
The Biden administration’s proposal is not exactly new. Sen. Bernie Sanders and Sen. Elizabeth Warren made wealth taxes part of their 2020 bids for the Democratic presidential nomination. Sen. Ron Wyden, the current chair of the Senate’s Finance Committee and the Joint Committee on Taxation, called for a wealth tax in 2021. Wyden’s plan, the “Billionaire’s Income Tax,” would tax billionaires (or anyone who earns more than $100 million in three consecutive years) at 20%. The Biden administration’s tax proposal is similar to Wyden’s, treating taxation of asset appreciation as a kind of “prepayment” of income taxes.
The appeal of a wealth tax has three faces. First, the tax is variously estimated to capture $360 billion in revenue over the next ten years. It also appeals to popular anxieties over income inequality in America, since so much of the wealth of the “One Percent” is tied up in asset appreciation rather than actual income. Finally, there is a political dividend. As the Biden administration tries to gin up enthusiasm for a possible reelection campaign in 2024, promoting a wealth tax is at least one way to rally the Democrats’ progressive base.
But the appeal of the wealth tax also has some major liabilities. The first is the staggering difficulty of determining the appreciation of value. For instance: Should an asset’s appreciation be figured on its “fair market value”? Who determines that? Should it be on whatever the market price might be on a given day? Which day? The variations within those possibilities should make heads spin, which is one reason why Janet Yellen has expressed skepticism about the difficulties in levying a wealth tax. None of that even begins to deal with the question of what is due an asset owner if an asset actually loses value.
Another ominous liability concerns who, exactly, would be paying such a tax. Advocates of wealth taxes have assured critics that the tax would affect only 700 uber-wealthy households – or, as President Biden explained, “One-hundredth of one percent of the Americans will pay this tax.” But new taxes tend not to be respecters of persons. There is no guarantee that the original targets of a wealth tax wouldn’t simply divert wealth into more difficult-to-value assets, or simply offshore their assets, and perhaps themselves as well. When François Mitterand introduced a wealth tax in France in the 1980s, more than 60,000 millionaires left France, and saddled the government with a net loss from what would have been their income taxes and value-added taxes.
If that flight were to be repeated in the U.S., Congress would be forced to drive the liability limit downward into the middle class, just to keep up revenues. It would not be difficult – in fact, it might be unavoidable – to find middle-income Americans paying the wealth tax on their cars, their homes, even their 401(k)s. It would also tempt federal fiscal policy makers to feed inflation, since inflation would float the face value of assets upward, even while hollowing out their real value.
The principal obstacle to a “wealth tax,” however, is in the Constitution. The Constitution strictly limits what the federal government can tax. It took the 16th Amendment in 1913 to permit Congress to levy a tax on personal incomes, and even that Amendment specifically limits the taxing power only to income, not wealth. Ever since the Supreme Court’s 1920 decision in Eisner v. Macomber, real income must occur before there can be taxable income.
But in a June 2022 decision by the Ninth Circuit Court of Appeals, a three-judge panel ruled in Moore v. U.S. that an offshore investment which had never paid a dividend could still be taxed as part of a “mandatory repatriation tax” created by the 2017 Tax Cuts and Jobs Act.
This obscure provision gave the three judges the opportunity to suggest that the 16th Amendment’s definition of income “is a flexible one” and that there is “no set definition of income under the 16th Amendment.” That leaves an open door to interpret any kind of increased value as “income.” The original plaintiffs have now asked the Supreme Court to review the judgment, arguing that the “decision shatters what had been an unbroken judicial consensus dating back to Eisner.”
In 2020, when he was still a candidate, President Biden dismissed the Sanders and Warren plans as mean-spirited and divisive. “Tax policy,” he said, “is not about punishment.” But three years is a long time in politics, and in 2023, punishment may now seem to be what pays.
This article was originally published by RealClearPolitics and made available via RealClearWire.