What are the Pros and Cons of a Wealth Tax?
If you drive a car, I'll tax the street. If you try to sit, I'll tax your seat. If you get too cold, I'll tax the heat. If you take a walk, I'll tax your feet…
“Taxman,” by the Beatles
Most of us are familiar with income taxes. In most cases, they’re deducted from your paycheck and detailed on your paystub – state, local, and federal.
Income Tax
When you do your taxes, these are the ones you’re either paying more of or getting a refund for the previous year’s overpayment. The wealth tax is NOT an income tax. It doesn’t rely on what you make.
Sales Tax
You’re also no doubt familiar with sales taxes. These are typically collected at the “point of purchase.” Most of the time we don’t even think about them, other than to make sure we have enough to cover them as we keep a running tally of our purchases in our heads. They’re typically determined by the state and county in which you live rather than the federal government. The wealth tax is NOT a sales tax. It doesn’t rely on what you spend.
We’re less likely to think about excise taxes, even though many of us pay them regularly. The most common example is at the gas pump. Some of what you’re paying per gallon is for the gas, but some is a special “excise tax” applying only to petroleum products used as fuel. They remind me of the “occupancy tax” you pay on most hotel bills, charged by state and local government on top of their regular sales taxes for you using the room in the first place. If you do sports betting or other gambling, you may run into “excise taxes” specific to your location and game of choice. The wealth tax is NOT an excise tax. It’s not tied to specific products or services.
I should mention one more before actually diving into the “wealth tax”:
Property Tax
Before state or local governments thought to charge sales taxes or income taxes, they derived most of their revenue from property taxes. As some of you have experienced firsthand, they’re still a pretty big deal. As the name suggests, property taxes are computed by multiplying the assessed value of your property – usually your home and the land on which it sits – by the property tax rate. In theory, these taxes go to pay for the support system around you which helps maintain your property’s value – police, fire, education, etc.
The purpose of taxing property rather than relying entirely on other methods is to maintain a degree of equity. The more expensive your home, the more you can presumably afford to pay. The implication is that you’ve benefitted from society’s stability, safety, and services, and are then expected to do your share in return. It doesn’t always work that way in practice, but the idea is sound enough.
Here’s the thing about property taxes which makes them different from income taxes, sales taxes, or excise taxes, though – if you stay in the same home, you’ll pay property taxes on that home year after year after year. It doesn’t matter if you’re still paying off your mortgage or free and clear, if you own it, you’ll be taxed on it repeatedly. The argument for this is that the services being paid for by those taxes are ongoing as well. Perhaps property taxes should be thought of as more like homeowner’s dues or a mandatory subscription to government services.
What IS a Wealth Tax?
A wealth tax is an annual tax on an individual’s overall wealth – your assets minus your debts. It’s not tied to income or sales, which are financial activities in which you partake. It’s connected to your valuables, your property, your savings, and investments. It’s a tax on what you hold on to rather than on what you do.
It would be in many ways like the property taxes we were just discussing, but with three key distinctions:
It would apply to total assets (minus outstanding liabilities), not just real estate
It would be instituted at the federal level, whereas property taxes are a function of state and local governments
It would only apply to people with a designated level of accumulated wealth – hence the name: wealth tax
The proposed wealth taxes most recently discussed during the Democratic debates throughout 2019 and early 2020 set starting points of above $30 million or more, meaning they’d impact fewer than 200,000 individuals in the entire United States – somewhere around 3 people out of every 10,000 citizens.
What Are the Advantages of a Wealth Tax?
If a wealth tax actually does what its proponents believe it will, here are a few of its most appealing features.
1. Help Rebalance Opportunity in the U.S.
One of the most popular talking points of those promoting some form of a wealth tax is that it would help to partially “balance the scales.” Wealth distribution in the U.S. is increasingly lopsided – and getting worse. The Federal Reserve's Survey of Consumer Finances for 2019 indicated that the top 1% of families own a higher percentage of the nation’s total wealth (nearly 40%) than the bottom 90% (not quite 23%).
A wealth tax draws from that top 1% (actually from a small fraction of that top 1%) and uses the funds to improve schools, health care, infrastructure – the stuff that allows individuals to better themselves. A wealth tax is much like a property tax in this way.
Is That, You Know… Fair?
Supporters of a wealth tax are quick to point out that they don’t see this as “punishing success.” A wealth tax doesn’t take away from income or entrepreneurship or even buying all the cool stuff you want. What it does tap into are those massive inherited fortunes that have such mixed impacts on their beneficiaries.
If America is intended to be a “land of opportunity,” supporters argue, it should be possible to work hard and make good choices and climb the economic ladder. Conversely, those who don’t actually do anything or bring any value to the world around them – economically, artistically, or otherwise – shouldn’t be insulated from the natural consequences of general uselessness just because their grandfather worked much harder than them.
2. Preserve Economic Stability
Historically, economies work fine when some people make more than others, or even when some families are richer than others. Nations don’t tend to prosper for long when a small handful of families own everything and everyone else has nothing. We’re not quite there yet; maybe we never will be. But it makes many economists nervous.
In theory, the wealthy invest and buy things and start companies and that wealth “trickles down” through the economic hierarchy. Supporters of a wealth tax don’t believe this works nearly as well as its proponents would suggest. Money, like water, should keep moving and accomplishing things to stay clean and productive. Leave the nicest swimming pool in the country unused for a season and see what happens; it becomes nasty, stagnant, and unusable.
3. More Accurately Taxes the Wealthy
One of the nicest things about being rich is that you can afford the best lawyers and accountants, who in turn find all sorts of clever ways to make sure you hardly ever have to pay your “fair share” of taxes. Besides, the ultra-wealthy don’t make most of their money from income (they’re not getting a paycheck from someone else). They make the bulk of their wealth from investments and other methods – paperwork tied up in terminology boxed in small print and requiring a Master’s Degree in Economics even to sniff.
What Are the Disadvantages of a Wealth Tax?
Not surprisingly, not everyone is quite so sold on the idea...
1. It Won’t Work
In recent decades, many nations have tried some form of a wealth tax. Most have reversed course after discovering how difficult it was to measure and enforce. Not all assets are in the form of stocks and bonds, or piles of cash in bags marked with dollar signs. Consistently assessing the value of privately held corporations or investments divided into infinite pieces and funneled through a half-dozen subsidiaries with holdings of something… well, it’s a mess. And what about things like artwork or rare collectibles?
Besides, opponents argue, if you “punish” people for being rich, they’ll simply move to a country that’s nicer to them. They can afford to, after all. This is sometimes called “capital flight,” and we see it happen with big businesses all the time. You want us to pay more taxes? Fine – we’ll set up shop on the remote island of Glutzenberg and do business from there instead. King Wally says we’re welcome anytime.
2. It’s Unethical and Unconstitutional
Like a property tax, a wealth tax is a double tax – the government takes its share when the income is made, then again each year after that income has transformed into assets. Opponents argue that in addition to actually discouraging success and investment, it’s simply wrong and “un-American.”
It might also be unconstitutional. Article I, Section 9 of the U.S. Constitution is a list of things that Congress is not allowed to do. The fourth clause says this:
No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken.
The thing about “in proportion to the census” is because the federal government wasn’t expected to tax individuals. The states taxed individuals, and the federal government had the right to expect contributions from the states. The money may have come from individuals, but indirectly. That changed with the passage of the 16th Amendment in the early 20th century. In case you don’t have your Pocket Constitution on you, it says this:
The Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
In other words, it changed the rule from Article I, Section 9. That’s what Amendments are – “edits” to the Constitution which update or alter the fundamental laws on which our nation is theoretically run. But notice the specifics – “taxes on INCOMES.” Not taxes in general.
Now, the thing about constitutional law is that nothing’s ever as simple or straightforward as you and I might expect. But this is enough of a snag that it might make passing a wealth tax tricky.
How Would A Wealth Tax Impact ME?
Unless you’re currently worth $30 million or more, it wouldn’t – not in terms of changing what you pay in state, local, or federal taxes, anyway. It might help fix up your local school or beef up local health care resources or something, so that would be nice. This assumes a wealth tax works the way it’s intended and the money is used for what its supporters expect.
You’d still be expected to pay your normal taxes. A wealth tax isn’t designed to REPLACE what the rest of us pay, just to supplement it and hopefully plug some rather gaping holes in our national budget.
Take Care of Your Taxes on Time with the Taxry Shop.
How Can I Get Ready for Tax Time?
Start by making sure you have any documentation you might need. All of your W2s, 1099s, or any other tax-related forms you received in the mail in the past few months. Most of us aren’t itemizing anymore, but if you are, make sure you have your receipts and related paperwork. Hopefully, you’ve kept a spreadsheet or something and not just a shoebox shoved in a drawer, but if there’s organizing to be done before starting the actual 1040 or whatever variation you use, might as well get on that now.
There’s a great list of practical (and emotional) tax tips you should check out as well. I find that even if I’m aware of most of them already, it’s nice to run through the list again from a fresh perspective, and there are always one or two I’ve forgotten since last year!
Do I Need a CPA?
Whatever were the ways you used to handle your taxes in the past, it’s worth asking yourself whether or not you want to use a CPA. If you’ve always done your taxes yourself, a CPA might find deductions you’ve overlooked or be able to reduce the stress and headache. If you’ve used a CPA in the past, you might be able to save some money by taking the extra time to do it yourself – especially if you’re at home more than usual these days. There’s no right way or wrong way; you’ll have to make the best call for your situation.
Whether you choose to use a CPA or do your taxes yourself, I recommend setting aside some time in advance to re-familiarize yourself with the different requirements and options – especially those that change from time to time. What’s the difference between deductions, adjustments, and credits? Who should itemize? Is it too late to make a few last-minute contributions to my IRA?
Whatever else you might say about the IRS, they have a rather thorough website full of information and forms, and it’s much easier to navigate understand if you’re not doing it at 11:48 the night everything is due.
Didn’t we learn that lesson in high school?
Finally, tax time is also a great time to “reboot” and plan ahead for next year while the process is still fresh in your mind. Organize some folders, prepare a spreadsheet, or look into an online tax manager or a phone app like Snap Tax which sends receipts and other relevant information straight to your digital lockbox. The best time to start preparing for next year’s taxes is right now!
Conclusion
The wealth tax will no doubt continue to be debated and may even eventually be legislated in some form. As an informed voter, you should absolutely continue to pay attention to the various sides of the issue and make your voice heard when the time is right.
In the meantime, there’s really no reason not to be as prepared as possible for filing this year’s taxes. Whether it’s April and you technically have until July, or it’s November and it feels like the next tax deadline is far, far away, there’s probably something you could be doing to make your life easier and your refund higher.
Stay healthy, look forward, and let us know if we can help.