A Case for the Elimination of Income Taxation

By April 18th, 2018

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A Case for the Elimination of Income Taxation
 – There Is a Far Better Way –

By
Mack W. Borgen
Santa Barbara, California

Author’s Note
I started writing this article over six months ago. Possibly it is merely a subliminal coincidence that it was finished this week – the same week that I, like you, completed my tax returns and paid my income taxes. On the other hand, this year’s taxes again reminded me of our need to replace the taxation of income in the United States.

Introduction
 – Maybe I Was Right the First Time –

Many years ago —- back when I had more energy and exercised less caution; back when I could party all night and still get up in the morning; back when I thought that prudence was for pussies and planning was for nerds, I wrote my law school thesis on the U.S. tax code.

Seriously, the U.S. Tax Code.

Following the mantra of my youth, it seemed like a good idea at the time. I was in law school, but Massachusetts is cold in the winter. It was dark and snowy. The wind was always howling. It was lonely, and I had no money. And, to be blunt, there wasn’t that much to do other than to write my thesis. Page by page.

But I realized, even then, that taxation was an important subject. Although I wasn’t particularly interested in income and estate taxation, my theory was it if I wrote my thesis on it, I would be forced to learn the subject.

So I sat in my library carrel all winter. And I wrote. Isolated deep inside the bowels of Langdell Hall, the Harvard Law School Library, I wrote about a radical alternative to income taxation, which was then and still remains the primary source of governmental revenues.

It seemed to me then, and even more now, that income taxation is an inappropriate basis for the imposition of taxes. It was then and still is. at best, a clumsy, inaccurate, means by which to measure one’s capacity or public duty to pay taxes.

My disdain for income taxation was further fueled by the hours of classes in which we, as students and future lawyers, were taught the wretchedly clever, but lawful, means by which income can be restructured or re-characterized from the high-rate “ordinary income” to lower-rate “capital gains” — you know, by changing standard W-2 income, which is still reported by a vast majority of Americans, to substantially lesser-taxed “capital gain” income. We were taught twisted machinations by which income could be averaged, deferred, or tax-straddled between years. We were taught the use of generation-skipping trusts so that substantial wealth could be passed, tax-free, from one generation to another generation – so properly named, the beneficiaries. And on it went.

One tax maneuver after another was presented as we learned how to guide clients to walk that sometimes perilously thin line between unlawful tax avoidance and lawful tax minimization.

It struck me that the course of correction would not be found by merely tinkering with the tax code or the hundreds of tax regulations. The wasted efforts of 22 Congresses since then have proven, in the opinion of this author, that this early conclusion was correct.

Instead, I thought that there must be a better; simpler; more efficient and equitable manner upon which to base our federal taxes. For the numerous reasons discussed below, I concluded that taxation upon one’s annually declared net wealth would be far superior to taxation of one’s annual declared net income.

It has been decades since I wrote my thesis on the advisability of such wealth taxation. Now, I suggest here again, that taxation should be based upon one’s wealth – not one’s income.

Be assured that this article is not written from the perspective of politics or in order to advance the agenda of any political party. In fact, I am becoming convinced that I am not smart enough to know to which party I belong: with whom I wish to be associated; and, for that matter, who would have me. So, please accept that this article is not about politics. This article is not about class or class warfare. It is merely about seeking the best, most efficient, and most equitable method by which to fund our national government.

One Assumption, One Clarification, and One Observation
– Economists, “Net Wealth” Tax, and Existing U.S. Wealth Taxes –

One Assumption – Economists. Before diving into the subject of wealth taxation, it would be useful to agree that economists and tax analysts rarely agree on anything – except for their delight in using thick talk and their strange love of macro models. While I have the highest regard for economists as an honorable and needed profession and even though economics was the focus of my undergraduate studies, let us agree upfront that no matter what I write here — and however you respond and react —, we can each find herds and gaggles of economists to back up whichever theory we choose to espouse.

One Clarification – “Net Wealth” Taxation Only. This article addresses the subject of a wealth tax, however in reality it is a “net wealth tax” which is proposed since the tax rate, whether progressive or fixed, would be imposed solely upon one’s “net wealth.” Very similar to the calculation of one’s net worth, a wealth tax would be imposed only in the event one’s net wealth (the aggregate value of all assets less the aggregate amount of all mortgages and other debts and liabilities) exceeds an agreed-upon baseline, minimum, and tax-triggering net wealth.1 The minimum net wealth would serve a function similar to that of one’s standard deduction in the context of income taxation.

One Observation – Existing U.S. Wealth Taxes. To a degree, the concept of a wealth tax is not new. As correctly noted and as well said by one writer, wealth is already taxed – “just not very intelligently.”2

The most conspicuous example of an existing wealth tax is property taxation which is the very foundation of the funding of local governments. The property tax rates vary widely from jurisdiction to jurisdiction based upon property tax rates, property valuations, and other factors such as the lock-in provisions of Prop 13 in California. Nevertheless, nearly every jurisdiction in the U.S. imposes taxes upon the raw ownership of real estate.

But I would respectfully suggest that the real question, so steadfastly ignored, is why these taxes are so routinely imposed on real estate — the bedrock asset of Middle America. Stated conversely, why are taxes not imposed on cash, stock and intangible asset portfolios – the bedrock asset of Wealth America?

Other examples of existing “wealth taxes” are estate and inheritance taxes. These taxes, derisively referred to by some as “death taxes,” are theoretical charges upon transferred wealth. However, the loopholes are bigger than the loops.  In the first place, federal estate taxes apply only to estates in excess of $11,200,000 for individuals and $22,400,0003 – an absolutely miniscule percent of the American people. These exemption amounts reflect the 2018 doubling by Congress and President Trump of the prior exemption amounts since the prior $5,490,000 and $10,980,000 ensnared, it was argued, far too many hapless, wealthy Americans.

However, the truth is that any wealthy person worth their weight in accountants knows that the imposition of nearly all estate taxes can be avoided. Estate taxes can be easily avoided by a myriad of estate tax planning techniques. As noted by Gary Cohn, the former White House National Economic Council Director and the former president of Goldman Sachs, “only morons pay the estate tax.” 4

Thus, for all practical purposes and due to the size of the exemptions and the plethora of tax-avoidance mechanisms, the “death tax” is now largely dead. It now only applies to the over-wealthy and under-lawyered.

The Place to Begin
In Considering the Advisability of Wealth Taxation

I noted above that this article is not intended in any manner to be political, and in reiteration of that point, the place to begin in considering the advisability of using wealth taxation is to understand that wealth taxation is not a Left-Wing, Bernie-rant.

First, when I initially wrote my thesis on wealth taxation as a substitute for income taxation, Bernie was still learning his “right” from his “left.” He had not yet ascended to any national stage. My proposal was written nearly 36 years before he even became a U.S. Senator. He was just another young man working as a carpenter after having moved to Vermont and after having graduated from the University of Chicago. So let’s not blame Bernie or any other liberals on this one.

Second, it has been my experience and, for all purposes of this article, this author happily and without reservation assumes that a vast majority of the wealthy are good and fine people. This article is not written from a place of envy, covet, or disgruntlement. For purposes of this article, this author is willing to readily assume that the assets, the life advantages, and the personal and financial security of the wealthy have been earned and that in a vast majority of instances, the wealthy currently protect and preserve their income and assets in wholly legal manners (albeit with a cadre of skilled lawyers and accountants). But none of these experiences or assumptions about the wealthy in America change the fact that many things must change in America – and one of them, one of the easier changes, is the basis upon which this nation collects its taxes, seeks to reduce its debt, and provides necessary governmental services.

Third, this author is no longer alone in this recommendation. Over the last couple of decades, a few people with widely disparate political and economic views have proposed implementing a wealth tax. In the late 1990s, even Trump proposed a one-time 14.25% wealth tax on individuals and trusts in excess of $10,000,000 in order to eliminate the national debt. Less surprisingly but more articulately, Robert Reich, the former Secretary of Labor under Bill Clinton and now a professor at the University of California at Berkeley, likewise advocated what he referred to as a “surtax” on the super-wealthy as a means to “rebuild our schools and infrastructure (and for) saving Medicare and reducing the long-term budget deficit.”5 The problem with both Trump’s and Reich’s advocacies are, however, that they sought to use a wealth tax as a curative measure (Trump to eliminate the national debt and Reich for a number of reasons – schools infrastructure, Medicare, and deficit). The proposal in this article is for the use of a national wealth tax as a permanent substitute for the archaic and burden-distorting income tax.

Fourth, in many parts of the world community, wealth taxes are not unusual. They exist in various formats in a number of countries – Argentina, France, Italy, Netherlands, Norway, Spain, and Switzerland. A number of other Western European and Scandinavian countries had wealth taxes but over the last couple of decades have discontinued their use for various reasons.6 Thus, while the U.S. has the dubious distinction of being the lone(ly) chair in the room as the only major industrialized country without any form of national health insurance, the U.S. would not be alone, or even particularly unique, if the U.S. adopted a form of wealth taxation.

Lastly, despite an anticipated initial reluctance of many wealthy families to embrace the idea of a national net wealth tax, many American families — and especially the middle income and moderately wealthy families — may pay considerably less under a net wealth tax system than they currently pay under America’s income tax system. This is definitely the case when one takes into account (i) the year-in and year-out costs of lawyers, accountants, and trustees, (ii) the complexities and time-consuming burdens of annual income tax preparations, and (iii) the hard- and soft-costs incurred and the contract and market distortions caused by tax-structuring transactions.

But there are many definitions of “wealthy” and there are many possible variants of a wealth tax which could be adopted.

The Relative Definitions of “Wealthy”
and the Many Possible Variations of a Wealth Tax

Defining when a person or family is “wealthy” is, at best, challenging. It can lead to heated debates at both the corner store and the local country club. However, despite the debates about where to draw the exact lines, clearly some people are “wealthy.” Clearly, some people are not. In this sense, the difficulties of definition are not of themselves justifiable reasons for not implementing a wealth tax.

For purposes of even preliminary agreement, let us agree that there is some net wealth number which approximates a valid distinction between the poor and middle persons and between the middle and the wealthy persons. Arguably, the appropriate exemption would be based at that point where a person has enough wealth to cover his or her immediate needs (food, transportation, housing, health, and other basic needs) plus a reasonable cash or other asset reserve.

Defining the threshold net wealth amount is generally beyond the scope of this article; however this author would suggest that it might be in the $3,000,000 or $5,000,000 net wealth range rather than the current absurdity of the $11,200,000 to $22,400,000 estate tax exemptions. Part of the reason for this proposed lower $3,000,000 to $5,000,000 range is because the wealth tax would be used as the primary source of revenues for the payment of national defense and public services. A wealth tax is not proposed as a grabbing super-tax by the 99%  of the wealth of the supposed 1%. To the contrary, it would be advisable for the tax burden to be more widely shared by using broader concept and definition of the wealthy. Thus, the $3,000,000 to $5,000,000 range is proposed as an initial working number. Although there are many gradations of wealthy and although American society now routinely talks about and magazines list “billionaires,” most Americans might readily agree that a person with a net wealth of “even” $3,000,000 to $5,000,000 is, at a minimum, colloquially, wealthy.

This author realizes that it is terribly dangerous to speak about other people’s wealth and, certainly likewise, to spend other people’s money (although this is addressed below). Nevertheless, it would preliminarily be useful if some numbers were used; some examples were displayed; and some orders of magnitude were presented.

Therefore, consider, as examples, the relative impact upon certain middle-income and wealthy families upon their following respective amounts of net wealth. Even assuming a fixed annual wealth tax rate of, say, 2%, and a flat net wealth exemption of $3,000,000, the amounts of such annual taxes and the post-tax net wealth of such families would be as follows:

Pre-Tax Net Wealth 500,000 3MM 10MM 100MM 500MM
Net Wealth Tax Liability (2%) 0 – Note 1 0 – Note 1 200,000 2MM 10MM
Post-Tax Net Wealth 500,000 3MM 9.8MM 98MM 490MM

Note 1: Assumes a $3,000,000 exemption amount.

As is evident and as noted above, some wealthy families may pay substantially less in wealth taxes than they currently pay in income taxes. Also as noted above, this is especially the case if one adds back to these families the “public monies”7 which they spend every year on tax advisors, financial planners, and accountants.

In the next section, other reasons for the adopting a net wealth system of taxation are presented.

Reasons for Wealth Tax

Reason One:
Net Wealth a Better Measure of One’s Capacity to Pay

Let us start with the obvious. People compare balance sheets. They don’t compare tax returns. There is a reason for this. Wealth, not income, is a far better measure of one’s financial condition and security; of one’s capacity, and arguably one’s civic obligation, to pay taxes.

When someone wishes to review or present their financial well-being, they look to their net worth – not their tax return from last year. Everyone knows that taxable income fluctuates. Everyone knows that income can be buried under artificial depreciations, by tax-year straddling, and by the careful timing and characterization (or, re-characterization) of tax-flows.

For these reasons alone, wealth, not income, is the best measure of one’s capacity to pay.

It is acknowledged that in the course of making lending decisions, banks routinely ask for one’s most recent tax returns in addition to basic asset and liability information. However, to a considerable degree, the lender’s insistent review of tax returns is because lenders know that tax returns approximate an “official document” since they are filed by the taxpayer/applicant under penalty of perjury. If people had to file net worth statements under penalty of perjury (rather than the crude bank form assets and liabilities listings provisions), this author suggests that — in quick order — balance sheets would become the primary loan application submission document. Thus, there is a both a simplicity and propriety in the use of balance sheets rather than tax returns to most accurately measure one’s ability.

It is also acknowledged that net worth does not necessarily reflect one’s cash liquidity, i.e. the amount of assets which are or can quickly be converted to cash. However, most persons (an admittedly dangerous vague phrase) have broad enough asset compositions so that tax payment liquidity should rarely be a problem. This is underscored by the amount of highly liquid, financial assets held by the wealthy.

There is much press, banter and discussion about the many forms of retirement plans — 401(k)s, IRAs etc., but the truth, so often ignored or forgotten by the wealthy, is that most Americans do not closely track the Dow or the S&P. This is because 90 percent of the financial assets in the U.S. – including both stocks and pension-fund holdings – “are owned by the richest 10 percent of Americans. The top 1 percent owns 38 percent” of all financial.”8 Wholly apart from pension funds (which are ever-declining in the U.S.) and maybe some mutual funds here and there, over-whelmingly stocks and bonds are (always have been) held by the wealthy. The rise and falls of the market ultimately affect all members of society, but such rises and falls only indirectly affect the lower and middle classes. In this sense, it is almost unsurprising that the financial markets are rarely a focused matter of interest for the middle or lower classes.

It could be argued by the wealthy that even with the access to cash liquidity for the payment of taxes, the imposition of this type of tax may force these wealthy citizens to liquidate assets in an untimely manner for tax payment purposes. However, think about this comment. Think about this concern. Is a wealthy family’s tax-driven liquidation of some financial holdings really different from a middle income family deferring a vacation because they have to pay taxes; from not funding their child’s college savings plan; from putting off some medical procedure or some desired home improvement? Even with the best planning, every family, rich and poor, incurs inconveniences, disappointments and even losses as they assemble cash for scheduled tax payments — and certainly liquidating stocks in a down market is not qualitatively different than deferring a deserved vacation or postponing a needed surgery.

But there is another asset-composition factor to be considered. That factor results from the fact that the dominant asset and most of the net worth of middle–income families and the only moderately-wealthy families is the highly illiquid and, if you will, necessitous family residence.

Because of the high wealth tax exemption amount (e.g. $3,000,000- $5,000,000), the taxpayer’s residence will rarely be at risk due to his or her tax liability. Future year tax liabilities may affect the size of one’s home. They may affect the advisability of purchasing second and third homes, etc., but this is no different than any other form of financial planning. We all buy homes and make investments with a prudent eye upon our foreseeable futures obligations and liabilities. And projecting one’s net worth (and resultant net tax liabilities) may be far easier than projecting one’s future income (and resultant income tax liabilities).

However, apart from one’s capacity and liquidity to pay taxes, the concept of using a wealth tax should also be based upon the relative receipt of public benefits. For some readers, this component of the wealth tax argument may generate more debate, but please consider the following reasoning.

Reason Two
Wealth Taxation As a Means of Eliminating the Absurdity of the Stepped-Up Basis

This reason requires my advance apology because it requires getting a little tech here, but a basic understanding of what is known as the “stepped-up” basis is necessary. Although financial/estate planning tools utilizing a stepped-up basis are not a secret and are commonly and routinely utilized in estate planning, it also not widely known or understood by the general public. But it should be.

Very summarily, the use of a stepped-up basis is a lawful means by which capital assets (think stocks, bonds, real estate, mansions, works of art) can be passed on tax-free from one generation to another. If any of these assets had been sold during one’s lifetime, then the appreciation component of the sales price would ordinarily be subject to at least the capital tax rate upon their sale. In other words, in very general terms, the tax would be imposed upon the difference between the sales price and the seller’s original purchase price since this is a taxable gain’ a form of “income.” However, even though part of the reasoning for the adoption of the estate and the capital gains taxes was to prevent (or at least limit) the growth of familial dynasties in the U.S. and to reduce inequality, it is obvious from especially the last several decades that these taxes have not achieved these goals. Part of reason is because if the wealthy during their lifetimes do not sell a capital asset (and don’t have to sell a capital asset to raise money to pay taxes for example), then the capital asset can be passed on to their heirs without ever having to pay capital gains on such assets. The gain — the appreciation – is safe. It is never taxed. It stays home free and clear. The deemed “purchase price,” i.e. the basis, of the asset in the hands of the heirs is the value as of the date of death of the benefactor. In this manner the heirs get a stepped-up basis. And on and on. Especially in an age where there is substantial wealth inequality, this results in capital gains taxes being avoided. Game. Set. Match. And the appreciated assets of huge estates are passed on tax-wisely and tax-free from one generation to another. From a economic-social perspective this reinforces the possibility, even likelihood, of impregnable wealth consolidations to be created within families. As despicable as it is to quote Leona Helmsley, maybe she was partly right – “only the little people pay taxes.”

With the adoption of a national wealth tax, a small percentage of the asset’s appreciation would be paid annually. Assets could still be conveyed from one generation to another, but the stepped-up basis mechanism of tax-free conveyance and assured inter-generational tax avoidance could be eliminated.

Reason Three:
Wealth Is a Better Measure of the Receipt of Public Benefits

Since the inception of our country, there has been debate about the value of government and the efficiency and utility of public services. That debate is set aside for another day; for another wave of our respective energies. This article accepts, for purposes of its analysis, the value and necessity of some level of governmental services.

And it is suggested that from a number of alternative perspectives discussed below, the wealthy – not the poor and definitely not the middle class – oftentimes disproportionately both structure and reap the benefits of those governmental services.

Admittedly, this is not inherently obvious. However, whether it be from the perspective of the recipients of defense policies and initiatives; from the perspective of business’ benefits from the (de-) regulation of the financial markets and the public investments in infrastructure improvements; from the educational training of our work force; and even from the slow, but determined, processes of our judicial system, it is the wealthy that receive the most public benefits — as much if not more, much more, than the lower and middle income classes. Reagan’s “welfare queens” get most of the press but that is not where the real money is.

The poor are the primary recipients of many forms of public benefits – from welfare to Head Start to government housing to, in some cases free, emergency medical care. But it is also the wealthy who rarely participate in military service. It is also the wealthy who, through a million machinations, receive many other, less visible, clusters of governmental contracts and services. In the context of the judicial system and access to judicial remedies, from the perspective of this author, it should be obvious that for hard cost reasons alone, the judicial process and the routine use of lawyers now lie solely within the province of the wealthy. Except in few and extraordinary circumstances, no poor person and very few middle income families can respond to the “so sue me” challenges which have come to dominate our economy and our society. The wealthy have growing influence, if not control, over our political processes and many of our governmental policies. Thus, it seems evident that the wealthy are well-aware of the impact and importance of government.

In 2010, a 5-4 majority held in the U.S. Supreme Court held in the Citizens United case9 that political spending is a form of protected speech under the Fist Amendment. As a result, the government may not keep corporations or unions10 from spending money to support or denounce individual candidates or parties in public elections. For reasons beyond the scope of this article and in part as the result of the Citizens United decision, it is increasingly difficult to track political contributions, but with respect to even reported contributions, the dominating influence and power of the wealthy is evident. In the 2016 election, for example, federal candidates received contributions from more than 3,200,000 Americans. But it is far more significant (and here relevant) that 50 percent of those total funds came from just 0.5 percent (i.e. just 16,000) Americans—wealthy Americans.11

For all of these reasons one’s net wealth, rather than one’s income, may be a far superior, mechanism for measuring the receipt and allocation of the government’s good and services being paid by taxes.

Reason Four:
The Need for Wealth Taxation May Be a Matter of Timing
And May Be Necessary Now (More Than Ever Before)

Whether America has been missing the mark by using income rather than wealth as the basis for it tax system can be left to historians and economists to argue about. The debates will be endless, and they’ll love it.

But there are new and clear reasons for shifting to a wealth tax which are relevant to all of us. These new reasons for shifting to a wealth tax are now compelling because the American economy is evolving to, in effect, a new form of capitalism.

Evidence of this evolution can be presented in many different ways — both in tone and use of terms. However, all of the evidence revolves around the undeniable fact that both income and wealth inequality have been growing. This has been especially true over the last three decades – from the Go-Go Years of the 1980s to the present.

We are far past Robin Leach’s Lifestyles of the Rich and Famous (1984-1995). Now, we are at point where conspicuous consumption has been displaced by dangerous, and dangerously entrenched, income and wealth inequality.

There is every reason to have a continued, deserved reverence for individualism and to have every respect for one’s desire to keep their “hard-earned money.” Such concepts are easy to grasp. They are tempting in their seeming fairness, indeed their almost morality. But such concepts are too simplistic. The real challenges come not from matters of individuals and ownership, but from the more subtle questions relating to such income and wealth inequalities.

For example, what are the ramifications to a society where there is a heightened concentration of wealth? What are the long-term effects of allowing such concentrations of wealth to be lawfully protected and passed one generation to the next without the “burden” of taxation or even partial disbursement – you know, as was done for hundreds of years in feudal Europe. There are ready examples of honorable largesse such as those extraordinary men and women who have joined Bill Gates and Warren Buffett’s Giving Pledge. But society cannot afford to wait and rely upon the beneficence of the wealthy… because the steady reality is that wealth is rarely disbursed.

Once wealth is assembled, it’s kept. Once it’s concentrated, it remains so. Except in those rare instances such as the Giving Pledge participants noted above and except in small doses resulting from periodic and percentage-of-wealth charitable giving, wealth is rarely disbursed except over the dead bodies of lawyers and the exhaustion of all appeals. There is nothing surprising about that.

For those readers who need harder evidence, they can read about the increased concentration of wealth in Thomas Piketty’s Capital in the Twenty-First Century. There is a reason this 2013 book, an economics book of all things, became a New York Times Bestseller.Americans can try to stubbornly try to dismiss Piketty as another intruding Frenchman, but it is in our country’s best interests to recognize that there are solid reasons to conclude that Piketty (and, if I may, me 40 years ago) may be right – that some form of a net wealth tax is necessary. Furthermore, to the extent that Piketty was right – that over time inequality is not an accident but a feature of capitalism which can be reversed only through state intervention – then obviously America’s lame and avoidable estate tax is not going to achieve this necessary re-distribution of wealth.

A brief digression is necessary because an insistent dismissal of the alternative and cynical concept of a “flat tax” is necessary. Some politicians  –speaking on behalf of themselves, their benefactors, and their benefactors’ lobbyists, suggest that flat tax upon income (rather than a progressive tax) is preferable. Unfortunately, this simplification is made at the expense of both equity and logic largely because, by almost any measure, the flat tax greatly benefits only the wealthy.

I have no objection to simplicity – and the flat tax does offer that — but not if that simplicity is delivered as a means of palpable misdirection; not if that simplicity comes at the price of stupidity; and, most importantly, not if that simplicity is far removed from the needs of this nation and its people.

The harshness of this digression is results from two facts. First, the absurdities of a flat tax are not just hidden. They are also obvious and counter-intuitive. Despite the equitable marketing ring of “everybody pays the same flat tax rate,” the tax burden and the true capacity to pay vary radically. Ten percent of one’s income to a low income family is a matter of rent. Ten percent of one’s income to a wealthy family is a matter of one less vacation. This is a coldly delivered example, but it is impossible to believe that the cynical proponents of the flat tax are unaware of the adverse impacts of such a tax. Ask any economist – or at least any economist not running for political office. By way of another flat-tax example, this is why our schools and our military are not funded by sales taxes.

On a more optimistic note, there may be positive socio-economic effects of adopting federal and/or state net wealth taxes in place of their income taxes.

Reason Five:
Positive Socio-Economic Effects of a Wealth Tax

Our respective teams of economists will fight till sundown, but it is here suggested that there would be numerous, positive socio-economic effects which would result from adopting a thoughtful form of net wealth taxation in substitution of income taxation.

Unburdening lower and middle classes would increase consumption and stir the economy. The economic elevation of the lower and middle classes would, over time, reduce their reliance upon the complicated and inefficient delivery of goods and services by governmental and quasi-governmental agencies and private charities. Lastly — in the long run and possibly the most important, the adoption of a wealth tax may lessen the growing cynicism of both the lower and middle classes about the financial equity of American life. Stated more positively, the adoption of a wealth tax may help regenerate this country’s faith in the American Dream.

We are all well aware of Keynes’ reminder that in the long-run we are all dead, but all Americans should care about the “long-run.” Almost definitionally we will not be able to be there. We will not participate in the later-years wealth, prosperity, and the democratic economy. Nevertheless, many Americans – both the poor, the middle-class, and the wealthy care about this country on par with themselves. Many Americans care about the America which we bestow to our children and grandchildren. And even if they don’t care, the intelligent wealthy know that in both the mid- and the long-term it may be in their own self-interest to more appropriately and equitably re-distribute wealth in this country. The Caymans and Belize may be fine off-shore habitats for one’s money, but not many account owners choose to have to reside there permanently in a self-imposed, or at least self-initiated, exile.

Author’s Note
This author well-realizes the harshness, even shrill, alarmist tone of the foregoing paragraph. However, in my humble defense, I have recently re-read Sinclair Lewis’ 1935 political novel It Can’t Happen Here which is premised upon the unwritten subtitle that “Yes It Can.”

In the next section this author has tried to recognize that there are valid concerns about the substitution of a wealth tax for the existing income tax. While this author does not believe that they support a rejection of the needed change to a wealth tax, these objections and concerns should, nevertheless, be noted.

Arguments against the Use of a Wealth Tax

The arguments against the wealth tax fall into two distinct categories. The first set of arguments relates to economic effect objections (e.g. capital flight and disproportionate burden) and administrative, valuation and enforcement issues. The second set of arguments relate to possible equitable and economic effects (impacts upon agricultural and family businesses and liquidity issues).

Capital Flight Issues

Some argue that a wealth tax would trigger capital flight from the United States to various tax havens around the world. However, capital flight already exists. It exists in the form of the almost understandable incorporation of their businesses in foreign jurisdictions (think, for example, Ireland) or the extensive use of foreign subsidiaries (think, for example, nearly every major international business) as a means of legal and illegal parking of off-shore income.

The imposition of wealth tax would have to address these issues, which is why Piketty, for example, recommended the imposition of a global wealth tax. However, the point to note is that in especially the electronically wired, global economy, this is already occurring. In the opinion of this author the associated problems are not unique to wealth vs. income taxation.

Administratively Burdensome
and
Complicated by Challenging Asset Valuation Issues

One of the most curious objections to the wealth tax is that it would be administratively burdensome and would be inherently complicated due especially to asset valuation issues. As noted by one Wall Street Journal writer, “the wealth tax has a fatal flaw—valuation.” 12 With a seemingly uniquely tin ear, that writer sought to underscore his point by noting that “62% of the wealth of the top 1% is ‘non-financial – i.e. vehicles, boats, real estate, and (most importantly) private business….” 13 Even ignoring the slightly “listen-to-yourself” echo of this statement and even admitting that some assets would be challenging to value for purposes of calculating one’s net wealth, these types of challenges are not different from the myriad of challenges inherent in our existing income taxation system

There would be issues of imprecise or even fraudulent valuations and appraisals, but are these issues materially different from the issues attendant to the almost routine billions of dollars of misclassified business expenses that are currently claimed under our income tax system? Are these types of valuation issues more complex than the definitional issues of income, deductions, and exemptions which are now built and buried in the 75,000 pages of our nation’s income tax laws?

Taxpayers may certainly require the assistance of more appraisers in order to substantiate their net worth valuations, but commensurately there may be less need for every taxpayer (and in fairness, especially every wealthy taxpayer) to have all of their transactions winnowed through the channels and loopholes of the existing income tax system.

Disproportionately Burdensome on Agricultural Business
and Marginally-Profitable Family Businesses.

It has also been suggested that the adoption of a wealth tax would be disproportionately burdensome on certain types of businesses – such as agricultural business and marginally-profitable family businesses. The suggestion and concern of these related issues is that it would be unfair to force families to sell, leverage, or close their agricultural businesses (the “family farm” argument) or their marginally-profitable family businesses. While this author is respectful of these arguments and while the shift to a wealth tax in all events should be imposed only after the provision of an honorable, multi-year advance notice, these disproportionate burden arguments are, upon closer examination, specious.

First, there is the obvious, almost dismissive retort. Yes, taxes are rarely fun to pay, but they are a “cost” of wealth. Just like now, tax payment dates would need to be honored, and some manner of achieving the necessary liquidity assured. But how is this different from the annual imposition of an income taxes or the multitude of other capital, wage or operating expense dimensions of the “family farms?” The same is true of small businesses except that such businesses are rarely asset-based (or, more particularly, real estate-based) enterprises. Thus, by definition, if they are only “marginally-profitable,” then this would be reflected in their low valuation and their possible full exemption from the triggering of any wealth taxes.

A second, more cynical interpretation of the “family farm” and the “small business” arguments is that they are economic variants of the politicians’ shameful invocations of “Middle  America” and “Main Street” and the “Common Man.” No article should ever engage in arguments of “trust me,” but be assured that few politicians can define winter wheat. Few politicians set aside winter money. Few politicians run a convenience store and even fewer have kicked dirt in Kansas. One of the true challenges to the wealth tax is that it is far more likely that its acceptance or rejection will be decided in the Hamptons and not on some  homestead in the Far 40 of Montana.

Burdensome if Taxpayer’s Assets Are Illiquid

Liquidity has been discussed above, but it needs to be again briefly addressed here in this section about the “Arguable Reasons Against the Net Wealth Tax.”

This author respects these liquidity concerns, but the liquidity concerns are common to both income tax and wealth taxation. Yes, the scheduled imposition of wealth taxes may require advance planning, but this is the same planning as is necessary in the case of income taxation.

Neither wealth nor income assure liquidity, and there nothing more illiquid than a low or moderate income striving to meet its income tax liabilities by deferring vacations, by depleting saving accounts, or by driving old cars. Unquestionably, families who have net wealth tax payment obligations may have to take some steps to assure payment of its annual net wealth tax liability, but – again – this is really, neither in a moral or economic sense, different from the current liquidity burdens faced each April by low- and middle-income families.

Disproportionately Burdensome upon Seniors

The last ditch argument of nearly every counter-campaign usually includes strutting out the widows and orphans, the old, aged, and infirm. And here we go again. This interposed argument against the wealth tax suggests that somehow it would be disproportionately burdensome upon seniors.

Firstly, allow us to be careful of the argument itself — the argument is not that it would be disproportionately burdensome upon seniors – but, more precisely, wealthy seniors.

Secondly, though a bit lame and for what it is worth, allow me to remind the reader that this author may well fit into this category — I am, by nearly all measures, a senior.

But, mostly, this argument fails precisely because it is irrelevant. The net wealth tax would be imposed upon wealth – not age. The fact that a disproportionate number of wealthy persons are older does not means that they have diminished capacity to pay; that they are incapable of tax-obligation liquidity planning; or, for that matter, that they too have not enjoyed the net wealth exemption during their younger years during which they assembled their wealth.

To the contrary, this is the exact generation which is oftentimes the most thoughtful, the most capable of managing its assets and making payments, and the most experienced, if and as necessary, in the use of financial planners and other advisors.

Closing

Thus, despite the fact that there are arguments against the use of a wealth tax, in the opinion of this author, the arguments favor its adoption. When I initially wrote my thesis about the necessity of adopting a wealth tax, I was far too young and dumb to be able to assuredly foresee the future. But, even at that time,  a wealth tax seemed like a (darn) good idea.

Now, I am old. Much older. Some things have changed only in the context of adjectives. For example, I am now too old and too dumb to assuredly foresee the future. But a wealth tax (still) seems like a (darn) good idea. Income taxation in our country is not working efficiently, effectively or equitably. For reasons of fairness and simplicity and because of the dangerous and growing inequalities of wealth in our country, the adoption of a wealth tax would trigger a thoughtful and equitable economic readjustment.

The most I can do is to humbly ask you to consider it. Seriously. Closely. And now.

Notes and Citations

1 Theoretically, such net wealth taxes could be imposable upon all parties, what are sometimes referred to as “legal persons” including corporations, however this article assumes that the reach of the net worth tax would be limited to natural persons (or families, in the case of, for example, jointly filed tax returns).

2 Yglesias, M., moneybox, March 6, 2013

3 For purposes of simplicity, this article focuses the estate tax, but there are multiple and parallel exemption amounts applicable to federal estate and generation-skipping transfers.

4 As quoted in Frank, R. cnbc.com, August 29, 2017. (Quoted remark of Gary Cohen to “group of  Senate Democrats”).

5 Reich, Robert B., “The Widening Wealth Divide, and Why We Need s Surtax on the Super Wealthy,” robertreich.org. See also, Reich, R., “To Restore Democracy We Must Tax Wealth, newsweek.com, September 18, 2017.

6 See, e.g. Denmark (1995), Finland (2006), Germany (1997), Iceland (2006), Luxembourg (2006), and Sweden (2007). Year of the country’s discontinuation of such taxes are indicated in parentheses.

7 The phrase “public monies” is used because, in a sense, without any impact upon the taxpayer, the monies spent by the taxpayer on legal, accountancy, and tax planning fees could be re-allocated to the government which, in turn, would lower – even further – the effective, necessary tax rate.

8 Reich, R., The Widening Wealth Divide, and Why We Need a Surtax on the Super Wealthy,” robertreich.org.,, March 12, 2012. Author’s Note: First, allow me to again remind the reader that my recommendation for a wealth tax is not politically driven. While I have a high regard for former Secretary of the Labor Reich, the recommendations in this article were initiated by this author nearly forty years ago. They are not derived from any agenda, liberal or otherwise, and they are not a feed-off from Mr. Reich. In fact, I respectfully disagree with Professor Reich’s concept of a “surtax” on the super wealthy. This author believes instead that a annual, low rate, progressive tax upon all persons or families of wealth – not just the super-wealthy, would be far more advisable. It may be far more equitable and enhance public revenues, and it may lessen incentives for capital migration.

9 Citizens United v. Federal Election Commission, 558 U.S. 310.

10 Some commentators have suggested a certain political-impact “balance” in the Citizens United decision because it arguably empowered both corporations and unions to make unlimited political contributions. However, this balance is not supported by the reality of the demise of unions as a major component player in U.S. political elections. According to the Bureau of Labor Statistics, as of 2018, there were approximately 161,000,000 American in our country’s work force. Of those, only about 14,800,000, i.e. only 9.1%, were members of  unions. In other words, the equivalence is not there. More than nine out of ten workers are non-unionized.

11 The Week, February 2, 2018, p. 16 (Citing The Washington Post).

12 Frank, R., The Problem with a Wealth Tax, The Wall Street Journal, January 11, 2012.

13 Ibid.


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Blog 76

April 18, 2018

By Mack W. Borgen

Santa Barbara, California


This entry was posted on Wednesday, April 18th, 2018 at 2:08 pm and is filed under Latest News, U.S. Taxation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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