Why a “wealth tax” is terrible public policy (and this is not even a controversial observation among economists)

The trouble with Socialism is that eventually you run out of other people’s money.

Margaret Thatcher

For months now, Democratic presidential candidates have proposed a litany of new spending proposals to woo the electorate into voting for them.

These include:

  • Medicare for All, which has a $32 trillion price tag – assuming it is extended only to US citizens, though most Democratic candidates have suggested also extending it to tens of millions of undocumented immigrants. I am not sure this additional cost has ever been scored, and any number would also be dependent on changes to immigration policy. For example, if crossing the border were made into a civil offense *and* immigrants qualified for entitlement programs, there would likely be an unprecedented number of border crossings. This would, in turn, significantly increase the cost of Medicare for All.
  • Forgiving trillions of dollars in outstanding student loan debt.
  • “Free” postsecondary education at public institutions.
  • A “Green New Deal,” which has not exactly been well-framed. The legislation introduced by Representative Ocasio-Cortez has been estimated to cost over $90 trillion. Presumably, the candidates want something a little more… modest… than replacing or retrofitting every building in the country. But after Medicare for All for anyone on the planet who wants to enter the country, who knows.
  • Universal pre-kindergarten.
  • Universal child care.
  • Universal raises for child care professionals and teachers.
  • Hundreds of billions of dollars to combat the heroin crisis.

I’m sure there are many more that I did not list here. Basically, so long as you are not a member of the dreaded “1%,” the federal government is going to assume all of your household’s ordinary expenses.

Nevermind that our existing entitlement programs are going broke, and no one is even trying to solve that…. Let’s add more!

This also does not take into account the fact that America’s existing entitlement programs are all headed for insolvency with no current plan to shore them up.

I’m impressed that Millennials think they are going to get Social Security, let alone free health care. Lol.

And let’s not even talk about how many public pensions are underfunded, which will be the next big generational pissing match to get lobbed toward the federal government. If you think student loans are a problem, wait until you see what California, Illinois, New Jersey, Connecticut, Kentucky, and Puerto Rico owe their workers that they’ve only saved pennies to pay out.

There is not enough money in the United States to fund Democrats’ spending proposals. Literally.

The obvious problem is how to pay for any single one of these proposals, let alone several of them. I think they are well over $100 trillion in spending proposals at this point. No kidding. According to the Federal Reserve, the aggregate net worth of U.S. households and non-profit organizations is barely $100 trillion, a record level both in nominal terms and purchasing power parity. This means that even if the federal government confiscated every single last dime from American households and every charity in the country, Democrats could still not pay for their spending proposals. That’s how batshit these people have become.

Of all the socialist-chic candidates, Bernie Sanders is at least approximating honesty when he tells people that he’s going to raise their taxes dramatically to fund his vision of universal health care. You won’t be paying health care premiums; you’ll be paying taxes. A lot of taxes. (In exchange for health care from the same geniuses that have veterans blowing out their brains in the parking lot of VA hospitals. But I digress.) Perhaps you won’t notice that he’s only changing “pay to the order of” on the check you write.

But let’s ignore the headline numbers and talk about a wealth tax anyway

The Hot New Thing among Democratic candidates is now a “wealth tax.” It’s not a hot new thing elsewhere in the world. In fact, a dozen other countries have already tried the wealth tax concept and promptly dumped it:

While as many as a dozen countries in Europe had a wealth tax in the early 1990s, that number has dropped to three as of 2018, according to an Organisation for Economic Co-operation and Development report. (In 2018, France replaced its net wealth tax with a new real estate wealth tax.)

So why are Democratic candidates proposing an idea that everyone else in the world has considered but rejected?

I imagine there are two reasons. One, the idea of a wealth tax is included in Thomas Piketty’s tome on income inequality, Capital in the Twenty-First Century. This made a bad idea trendy again. Two, they have nothing else. They are proposing an obscene amount of new spending and are hoping the electorate’s economic resentments will cancel out numeracy. Polls suggest they might be right, particularly among highly innumerate younger generations.

Since some Americans seemingly have to re-discover why socialist concepts of governance necessarily and inevitably fail in the real world, here’s why a wealth tax is a terrible idea.

(1) A wealth tax will not generate as much money as Democratic candidates suggest.

Let’s bracket off the fact that Democratic candidates’ wealth tax projections are insufficient to pay for their proposals in the first place. Even liberal economists acknowledge that the projections they have made are grossly inflated.

This is why the idea of a wealth tax was never seriously considered by the Obama administration. Obama’s policy advisors thought it was laughable when he was in office, and they are trying to communicate that is laughable now.

There is a reason why Elizabeth Warren et. al. have chosen policy advisors that do not have experience in government scoring budget measures. Anyone with experience observing how wealthy people skirt the estate tax understand that people wealthy enough to have tax advisors will understand how to shelter their wealth from taxation. It would do Warren well to take a vacation in the Cayman Islands sometime. Extreme wealth is extremely portable.

(2) “Wealth” is not “cash.” The assets of America’s wealthiest families can fluctuate dramatically day-to-day and can be extremely difficult to value.

What’s the daily mark-to-market value of Zuckerberg’s modern art collection? How much does a $200 million yacht depreciate when you sail it away from the yacht broker? How often are you going to value a privately held company?

Every country that has ever implemented a wealth tax has discovered that it is an administrative nightmare to enforce. It’s not as simple as asking “ultra-millionaires” to check their bank account.

You’d think Warren, an expert in bankruptcy law, would understand this. There’s a reason bankruptcy proceedings can drag on for years. You can dispute the valuation of illiquid assets until the end of the republic.

(3) Contrary to what Warren claims, her proposed wealth tax is not at all like paying property taxes on real estate.

I almost can’t believe Warren is dense enough to make a claim like this. But here we are explaining how taxing unrealized gains in Facebook stock is not like taxing a home on a cul-de-sac in Phoenix. And why she’d essentially be taxing the same assets several times. And why she’d kill the market that state and local governments use to fund infrastructure projects, like roads and schools.

First, traditional property taxes have a comparatively efficient tax base. Traditional property taxes fall on both the building and the land underneath. Land is thought of as a very good tax base because its supply is fixed—individuals and businesses cannot avoid a tax on land by producing less of it. Because of this, economists generally think that land taxes are very efficient taxes. In many jurisdictions, the land is a significant portion of the total value of real estate. As a result, a meaningful portion of real property taxes share this positive characteristic with a land tax.

Warren’s wealth tax would apply to land, but it would also fall on many other types of assets, some of which are much more responsive to taxation. For example, Warren’s wealth tax would fall on the ownership of financial assets such as corporate stock or bonds. A wealth tax would reduce, sometimes significantly, the return to these assets. For example, municipal government bonds, which have interest rates around 2 to 3 percent, would face effective tax rates higher than 100 percent. This would make it much less likely that individuals would hold on to these assets. This could have several negative effects on the broader economy, including a reduction in national saving.

Another virtue of the traditional property tax is that the taxable asset isn’t particularly hard to value. While there can be controversy over the value of property in a given year, localities are pretty good at determining it. One reason is that there is a lot of property to compare to and homes are sold frequently in many places. There are companies that can tell homeowners what their house is worth at any given time.

The wealth tax would fall on many assets that are very hard to price. For example, a closely held business—one that is not traded on the market—does not have a known value, and the value can change significantly from one year to another. As a result, it would be very challenging to apply the wealth tax. Tax authorities would either need to guess or use some sort of formula to impute the value—a process taxpayers would be unlikely to trust.

For homeowners, there is another important distinction to consider. Under current law, the returns to homeownership are mostly exempt from the income tax. Under current law, the first $250,000 ($500,000 for married couples) of capital gains on the sale of your primary residence are exempt from the income tax. In addition, the imputed rental income (the rent you, as a homeowner, pay yourself) is exempt from the income tax. The CBO shows an effective rate close to zero. As a result, the state and local property tax is usually the only tax that falls on real estate for homeowners.

In contrast, a lot of the wealth under Warren’s wealth tax is already taxed under the income tax before it’s hit by the wealth tax. For example, dividends from corporate stock are subject to the individual income tax. Then the value of the stock would be taxed under the wealth tax. The assets subject to both taxes would face significant effective tax rates—a combined tax burden that homeowners don’t face.

(4) A wealth tax will be an economic drag. Not just because it’s going to move wealth away from the country, but because it will influence major investment decisions.

I often say that I would rather get a root canal than talk to a Democrat about economics. Democrats tend to assume that their fellow citizens are not rational economic actors. You create a new tax, they think, and people just roll over and pay it. In reality, people change their behavior in response to ordinary activity suddenly becoming a tax penalty. In policy circles, these behavioral shifts are called unintended consequences.

This means a tax that Warren bills as forcing the wealthy to pay for everyone else to carry less household expenses will actually impact what the latter earns. Or even if they have a job at all. (But, hey, at least that would cut down on child care expenses.) Wealth taxes reduce investment, wages, employment, incomes, and output. They depress financial holdings, which most Americans store their own wealth in.

This also means that this tax, which takes so many government resources even to enforce, reduces tax revenues to the federal government, state governments, and local governments through lost economic activity.

Before you pull a lever for a charlatan selling you on ideas that other countries have already tried and rejected as abysmal failures, ask yourself this question: Will I ever see any of this free shit they promise? Or will I actually be worse off economically than I am now, just like every socialist experiment that has taken place in the history of human civilization? If there is a consensus among educated people that these policies fail, why are they centerpiece of these candidates’ campaigns?

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