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The Inherent Problems with a U.S. Wealth Tax

December 23, 2019

Democrats like Elizabeth Warren and Bernie Sanders are proposing an annual tax on wealth (all assets, not just income) aimed at the richest Americans.

 

Under this plan, Americans with more than $50 million in assets would be taxed 2 percent on their net worth, while billionaires would be taxed 3 percent on their net worth.

 

Since there are so few Americans who would pay this tax, the idea has ample public support. But all those in favor of this tax don’t realize its inherent issues.

 

For instance, it’s an incredible invasion of privacy. The Sixteenth Amendment requires taxpayers to disclose income, but we’ve never had a tax law that required wealthy people to disclose all their assets, value them, and pay tax on that amount.

 

Imagine the burden for these folks, having to itemize and value everything they own, including real estate, automobiles, yachts, art, furniture, and jewelry. It’s costly to hire appraisers who can value rare, hard-to-value assets.

 

Beyond that, the IRS doesn’t seem to be in any position to enforce a wealth tax law. It’s easier to tax based on the value of income and investments. It’s much harder when asset values are left to the interpretations of appraisers.

 

The ultra-rich would revolt if they had to disclose everything they had to the government. Most of these people are intensely private and would quickly move assets to a friendly tax haven somewhere else in the world.

 

On top of that, it may not pass legal muster. Article 1, Section 9 of the U.S. Constitution forbids a direct tax, unless it’s in proportion to the census of the population. Under this limit, a wealth tax is unconstitutional.

 

But wait, there’s more.

 

What about the powerful disincentive this tax presents for successful Americans to obtain wealth?

 

Lastly, there’s no guarantee the thresholds wouldn’t decrease over time, affecting more American taxpayers…maybe even everyone.

 

It should be obvious this is bad economics. The top 1 percent pay a greater share of federal income tax than the bottom 90 percent combined.

 

Why make our investment climate worse? We should find ways to make things more inviting for the rich, not drive wealth away.

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