The Wealth Tax: An Idealistic Impossibility
Blog Post | 110 KY. L. J. ONLINE | February 16, 2022
The Wealth Tax: An Idealistic Impossibility
By: TJ Kormanis, Staff Editor, Vol. 110
The lockdowns that followed the onset of the COVID-19 pandemic created unprecedented economic hardship for many citizens and businesses across the nation.[1] While most of the country struggled to adapt to the new economic landscape, billionaires saw their collective net worth balloon by more than $2 trillion.[2] The increasing disparity between the upper class and the rest of the United States resurfaced a political push for a federal “wealth tax.” Progressive politicians have justified wealth tax proposals by identifying the need to restore fairness and to generate more revenue.[3] Unfortunately, it is unlikely that a wealth tax would successfully accomplish either of those goals due to the administrative difficulties, the unclear plan on allocation, and the wealthiest individual’s ability to avoid taxation.
While no wealth tax proposals are the same, they all intend to tax the market value of the assets owned by the richest individuals.[4] Senators Bernie Sanders and Elizabeth Warren have proposed legislation that would require the richest citizens to pay an annual federal tax on a percentage of their total wealth, not just their income.[5] As simple as this may seem, pinning down the exact value of someone’s wealth is extremely difficult. The Internal Revenue Service (IRS) does not continuously track the value of an individual’s assets or liabilities, meaning they would struggle to identify the exact amount of taxable wealth. If the IRS began tracking wealth, these calculations would be nothing more than rough estimates. How could the IRS be expected to place values on things like a private business, an obscure art collection, or a digital folder full of Non-Fungible Tokens?[6] Even if the IRS could accurately calculate wealth, billionaires still have the means and ability to hide, move, and convert financial assets in order to make their wealth appear smaller.[7] Regardless of how simple the tax may seem, the reality is that accurately enforcing it would be a near impossibility.
One of the main reasons politicians continuously propose a wealth tax, or any tax, is to generate more revenue for the federal government.[8] Since there are only roughly 800 billionaires in the United States, the government would need to tax them at an extremely high rate to raise a substantial amount of revenue.[9] These high rates would then encourage wealthy individuals to hide their assets in order to avoid taxation.[10] Colombia, France, Switzerland, Norway, and Spain are some of the only countries who have successfully enforced a wealth tax, however their rates are much lower than what has been proposed by U.S. law makers.[11] These lower rates, while potentially preventing some tax avoidance, fail to accumulate substantial revenue. In those five countries, wealth tax revenue, on average, made up less than two percent of the country’s total revenue.[12] Setting a rate too high would likely cause the rich to exercise their ability to hide wealth, and setting a rate too low would fail to generate revenue. Both outcomes fall short at achieving the goals of a wealth tax.
A tax on wealth is also argued to reduce the disparity between the richest and poorest citizens, and thus begin to restore fairness in our economy.[13] This could not be farther from the truth. Taxing the wealth of the richest citizens, assuming it is even administratively possible, would “allow inequality measures to report significant progress, [yet] would do nothing by itself to improve the living standards of people at the bottom of the distribution.”[14] Legislation containing wealth tax provisions often lack clear allocation of where the raised revenue would go. The government would likely take the increased revenue and pump it into new or existing programs that have historically done little to improve the lives of those who need it most. The ideology behind a wealth tax erroneously focuses “on reducing the wealth of the [richest individuals] rather than on helping low-income households.”[15]
When a majority of the country is struggling financially, and a select few individuals are thriving, there are obvious issues that must be addressed. While a wealth tax is well intended and does aim to address those issues, it is not the solution the United States needs. A wealth tax would create serious administrative issues for the IRS, lead to tax avoidance by the rich, and likely fall short of reducing inequality or raising substantial revenue. I am confident our nation can solve these complex issues, but it is time for our law makers to move past solutions centered around a wealth tax.
[1] Lauren Bauer, Kristen Broady, Wendy Edelberg & Jimmy O’Donnell, Ten facts about COVID-19 and the U.S. Economy, Brookings (Sept. 17, 2020), https://www.brookings.edu/research/ten-facts-about-covid-19-and-the-u-s-economy/.
[2] Kevin Reed, US billionaire wealth increased 70 percent since the start of the pandemic, World Socialist Web Site (Oct. 19, 2021), https://www.wsws.org/en/articles/2021/10/20/bill-o20.html.
[3] Allison Schrager & Beth Akers, Issues 2020: What’s Wrong with a Wealth Tax, Manhattan Inst. (Oct. 8, 2020), https://www.manhattan-institute.org/whats-wrong-with-a-wealth-tax.
[4] Michelle P. Scott & Robert C. Kelly, Wealth Tax, Investopedia (Mar. 15, 2021), https://www.investopedia.com/terms/w/wealth-tax.asp.
[5] Greg Iacurci, Elizabeth Warren, Bernie Sanders propose 3% wealth tax on billionaires, CNBC (Mar. 1, 2021, 5:18 PM), https://www.cnbc.com/2021/03/01/elizabeth-warren-bernie-sanders-propose-3percent-wealth-tax-on-billionaires.html.
[6] See generally Mitchell Clark, NFTs, explained, The Verge (Aug. 18, 2021, 9:20 PM), https://www.theverge.com/22310188/nft-explainer-what-is-blockchain-crypto-art-faq (defining “non-fungible” as something that is unique and cannot be replaced with something else).
[7] Schrager & Akers, supra note 3.
[8] Id.
[9] Theodore Schleifar, America has almost 800 billionaires, a record high, Vox Media (Jul. 1, 2020, 8:30 AM), https://www.vox.com/recode/2020/7/1/21308816/billionaires-record-america-world-wealthx.
[10] Schrager & Akers, supra note 3.
[11] Id.
[12] Daniel Bunn, What the U.S. Can Learn from the Adoption (and Repeal) of Wealth Taxes in the OECD, Tax Found. (Jan. 18, 2022), https://taxfoundation.org/wealth-taxes-in-the-oecd/.
[13] Schrager & Akers, supra note 3.
[14] Ike Brannon, A Wealth Tax Is Not A Solution For Income Inequality, Forbes (Sept. 29, 2020, 12:38 AM), https://www.forbes.com/sites/ikebrannon/2020/09/29/a-wealth-tax-is-not-a-solution-for-income-inequality/?sh=be09c2c7f5b8.
[15] Id.