Considering a Wealth Tax for the U.S.

 

What should a country do when it has

  • Massive accumulated debt and annual deficits predicted to grow indefinitely.
  • A rapidly growing population of retirees heavily dependent on expensive entitlement programs such as Social Security and Medicare.
  • A national Congress which is unwilling to make significant spending cuts for fear of offending powerful constituent groups.
  • Growing income inequality and wealth inequality.
  • A stagnant economy and high unemployment which makes inequality worse.
  • An inefficient income tax system which does not take in enough tax revenue to pay the bills.

The best response by far is to implement broad-based, pro-growth, tax reform.  I have often discussed how to make major changes to our current income tax system.  I have also described an attractive way to introduce a consumption tax, the so-called Graetz Plan.
CaptureAnother way to reform taxes is to introduce a wealth tax.  The economist Ronald McKinnon has described a way to do this in a Wall Street Journal column, “The Conservative Case for a Wealth Tax”.  His plan is to implement a federal wealth tax in addition to the federal income tax.  It would consist of a flat tax of about 3% imposed on household wealth in excess of a $3 million exemption which would exclude 95% of the population.  In addition to bringing in a significant amount of new revenue each year, which is its principal objective, it would serve the purpose of making a flatter, pro-growth, income-tax system more palatable to people who are concerned about inequality, and therefore to a much wider audience.
The economics journalist, Daniel Altman, recently reported in the New York Times, “To Reduce Inequality, Tax Wealth, not Income” that American household wealth totaled more than $58 trillion in 2010.  The most recent issue of Forbes Magazine reports that there are now 492 billionaires in the U.S. with a total wealth of $2.3 trillion.  A 2% tax on the wealth of just these billionaires alone would raise $46 billion.  A 0.5% tax on the wealth of all Americans would raise $290 billion annually.  These examples show that a “moderate” wealth tax could bring in a significant amount of new tax revenue which would make a big dent in shrinking our annual deficit.
We have to do something and do it quickly.  The problem will occur when interest rates return to their normal level as they surely will before long.  When this happens, interest payments on our national debt will sky rocket.  It’s going to be painful regardless, but let’s try to head for the softest landing we can manage!

7 thoughts on “Considering a Wealth Tax for the U.S.

  1. Jack, I support your tax reform proposal of a consumption tax. A flat income tax rate would be a good start but I would favor moving on to a consumption tax.

    Wealth taxes are , however, perhaps the most egregious form of government-sanctioned theft in the name of the misguided altruism morality that establishes out purpose in life is to be that of self-sacrificial animals at the service of any and all regardless of their value to us personally. Involuntary redistribution of wealth is justified by insinuating that to be rich is to be evil. I submit that the evil in this discussion is in fact the government-sanctioned theft involved in the involuntary redistribution of wealth.

    It is true that there is a growing wealth disparity between the very rich and the rest of us. The fix for that is to remove the crony capitalism preferences for everybody including the very rich who get a disproportionate share of the preference booty that invariably goes to those with the most influence in the form of bailouts, subsidies and the like.

    The resulting boost to our economy by eliminating our crippling preference system would not only reduce the advantages for the influential very rich but also in fact produce a much higher percentage of rich and benefit the middle and poor to an even greater degree. The larger number of rich would generate a huge increase in voluntary redistribution of wealth with the side-benefit in huge productivity gains as the rich invest in their fellow man based on their value assessment of who deserves to be invested in, an element sadly lacking in government involuntary redistribution of wealth.

    The important issue in this discussion is that any way you slice it or attempt to justify it, the government-sanctioned theft involved in involuntary redistribution of wealth is just plain evil as well as bad for our economy and especially devastating to the middle and poor that depend on a healthy economy to survive and rise above the poverty level.

  2. I totally agree with you that our present tax code is rife with cronyism, i.e. deductions, preferences and loopholes which primarily benefit the wealthy. Eliminating these tax preferences, and replacing them with a flatter income tax system with lower rates would give a big boost to our economy and therefore be highly beneficial to the unemployed and underemployed.
    The problem is that lowering tax rates, even when paid for by eliminating preferences, is viewed by many as making inequality even worse than it already is. All forms of taxation are government theft. The question is how to do this in the most efficient and least obnoxious way. A very small percentage wealth tax, with a large exemption to make sure that only the “truly wealthy” are affected, would be a highly visible measure to clearly demonstrate that the wealthy are paying their fair share of taxes. The money raised would reduce the deficit and, at the same time, create more willingness to carry out fundamental broad-based tax reform, with lower rates, in order to stimulate the economy.
    Our present course of national behavior, with virtually unchecked deficit spending, will very soon lead to catastrophe. I think that we need to be very flexible and open minded in order to be able to reach the political consensus necessary to take the strong measures necessary to change course.

  3. I agree that a flat income or consumption tax with no preferences (no loopholes or deductions for anyone) would be a huge step in the right direction. You might justify a flat tax as a fee for legal and protection services rendered in proportion to income and consumption. But as you correctly point out, all forms of taxation are government theft.

    My point is that there is no way to equate a tax fee for services rendered with wealth taxes or any other form of involuntary redistribution of wealth including “progressive” graduated taxes or deduction loopholes that invariably end up favoring the very rich. Involuntary redistribution of wealth merely pays lip service to the destructive morality of altruistic self-sacrifice.

    To make matters worse, involuntary redistribution of wealth at the point of a gun (you go to jail if you do not pay the tax) fails to help the supposed intended beneficiaries. It instead ends up feathering the caps of the very rich courtesy of the political machinations of, guess who, our popular but untrustworthy Keynesian economics “Cronycrat” middle men who prostitute themselves by selling preferences in exchange for votes.

    Value-based voluntary redistribution of wealth enabled by a healthy economy fueled by a flat income or consumption tax with no preferences for anyone would not only be a much more beneficial approach for all of us but also would set a good example by being a much more moral solution.

  4. I think I see where our disagreement lies, at least in part. You believe that the main, if not the only, purpose of taxation is to pay for “legal and protection services.” I’m willing to go well beyond this and to use tax money to pay for various kinds of general welfare but only with one restriction. It is simply that we’re willing to pay for whatever services we’re providing with current tax revenue as opposed to funding them with deficit spending.
    In other words, there is a continual tradeoff to be made. If we want more services then we raise taxes to pay for them. If we’re not willing to raise the taxes, then we don’t spend the money. This is, of course, how every economic unit such as a business, family or individual operates, as well as all units of government below the federal level.
    We have strayed from this fundamental principle in the past 35 years and now we’re going to have to pay for it. Somehow or other we have to make a major adjustment and get back on track. It’s going to be painful but the longer we avoid taking action, the more painful it will be in the long run.

  5. It is easy to be generous with money belonging to other people and use it to spend on your general welfare goals. Many including me do not want these services provided by the government knowing full well the cost inefficiencies and inevitable corruption involved. This is on top of the fact that the services rendered by the government are invariably lousy and in many if not most cases actually make matters worse, particularly involuntary redistribution of wealth taxes. This is evidenced by the sad condition of our economy driven in part by the eroding work ethic and productivity of those who do want these government services as long as they are paid for by someone else.

    Anyone with any economic common sense knows that the most effective and responsible way to handle personal healthcare, retirement and other insurable needs is to buy catastrophic high-deductible insurance at a reasonable cost and then save and self-insure for daily expenses. Those who love government services think they have the right to expect insurance paid for by someone else that covers both their catastrophic and DAILY expenses. That means layering insurance company profit on top of the lousy and cost inefficient services provided by the government just to cover daily expenses, an obvious multifaceted drain on our economy.

    A democracy does not have the right to trump natural inalienable individual rights. Rights are an attribute only of individuals. A group is not an individual living thing and does NOT have rights. We band together as a society because we are willing to give up the freedom to go around violating other peoples’ rights to get what we want. We give up that “freedom” because we expect in return a society that respects our natural inalienable individual rights.

    A democracy that votes in tax laws, entitlements and other preferences is in fact trumping and trampling on our inalienable individual rights. Not surprisingly, it is not working well judging by the sad state of our economy. Returning to a minimal government with the sole purpose of protecting our individual rights and financed by a flat rate income and/or consumption tax would be a huge step in the right direction. More involuntary redistribution of wealth taxes would be a huge step in the wrong direction.

  6. My program is more limited than yours. I don’t expect, or even want, to end welfare. I just want to pay for it with current funds, rather than with borrowing. Instead of fighting over how much welfare to provide, I say let’s fight over how much we’re going to raise taxes to pay for it. To me a wealth tax would be a small price for society to pay in order to bring our finances into balance. We simply cannot go on the way we are. Fiscal conservatives will have to agree to increase tax revenue and liberals will have to agree to operate government at much lower cost. Nothing else will get the job done.
    Continuing to kick the can down the road is reprehensible and unacceptable.

  7. I agree with you that something must be done now. The trick is what will work the best in the short term to trigger the agreement between the fiscal conservatives and the modern liberals to cut costs and balance the budget that we both agree on. We can agree to disagree on the solution details but I hope you are successful in achieving the short term goals you are working tirelessly on.

    Just as big a question is what will work the best in the long run to prevent it from happening again. I will continue to work on changing the intellectual environment that I see as a precondition to solidifying your short-term gains and preventing a re-occurrence.

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