The one theme that underpinned the last election cycle was the state of the economy. Slow economic growth has plagued the United States, and in fact many countries around the world, ever since the financial crisis and the global recession that followed. But why hasn’t a country as large and economically diverse as the US been able to pull itself out of this fiscal funk? One compelling argument, highlighted in this report form the IMF, claims that inequality is the reason. According to the CIA World Factbook, the US is ranked 42nd in the world in income distribution — worse than Burundi, Ivory Coast, and India. This ranking is not arbitrary and such a massively skewed distribution of income can have strong economic repercussions. According to the IMF report:
A 10 percentile decrease in inequality (represented by a change in the Gini coefficient from 40 to 37) increases the expected length of a growth spell by 50 percent.
That is a huge reaction to a small stimulus, and one that the US could use right about now. So, how do we go about solving our income distribution problem? Economist Daniel Altman has an idea: tax wealth, not income. In a recent oped for the NY Times, Altman laid out his plan repeal the federal income tax and replace it with a tax on overall wealth. According to Altman’s plan, families with less than $500,000 in total wealth would pay a rate of 0%; that rate would jump up to 1% for those in the $500,000 to $1 million range, and 2% for those with $1 million or more in total wealth. According to Altman, under such a plan:
[T]he majority of American families would receive an enormous tax cut. Some would owe only payroll taxes (for Social Security and Medicare) and state and local taxes every year, and others would pay less in wealth tax than they did in income tax. Taxes on earnings, capital gains, dividends and interest, all of which may distort decisions about working and investing, would disappear.
Altman readily admits that his plan is not without it’s complications, but nothing that could not be worked through with careful planning. At any rate, it is an interesting (if not entirely new) idea and Altman makes a good case for it. Read the article in its entirety here.
wtf, Cobra? 
December 2nd, 2012 at 21:16
There are (at least) four major problems with the “wealth” tax.
1 – People Who Get More Back Than They Pay In
First off, b/c of the earned income credit we have a tax system whereby about 15-20% of tax filers get more money back (via refund) than they paid in tax. i.e. We redistribute wealth via the tax code.
Also, we have the foreign people who do something similar. Recall this story from earlier this year. http://redalertpolitics.com/2012/05/03/illegals-getting-billions-in-tax-refunds-for-kids-in-mexico/
These are two groups of people who — using language of the day — would be facing a massive tax increase should we move to a wealth tax even where their rate would be zero. That would be very unpopular with current Progressives and not get through Congress.
2 – It’s Unconstitutional
Read the 16th Amendment; a wealth tax is not covered. The proposal would require a constitutional amendment to implement. That’s not impossible; just difficult.
3 – It Doesn’t Work as Claimed
Assuming U.S. gross wealth at around $58T (see article) and assuming the top 1% control 34.6% of the wealth & the top 20% control 85% (via Wikipedia). The wealth controlled by the top 1% and 20% are roughly $20T and $49T respectively. Assume you tax the wealth of the entire top 20% ($49T) at 2.0% (as suggested by the article) to get tax revenues of $980B. That would just about cover Social Security expenditures in 2012…. and nothing more. You’re still several trillion dollars short of what you really need. So… it’s a scam.
Further, in the calculation of wealth I own my house. But I happen to owe more than it’s worth. So does the government tax me on the the balance that I owe or the value of the house. Who sets the value and more importantly why should I be taxes on something which I owe a few hundred thousand dollars anyway?
4 – It’s Wholly Unjust
Consider what happens when you have billionaire who has a bad year. His effective tax rate can be infinite of his income. Your going to tax the entire wealth of someone (or their family as suggested by the article) at 1 or 2%. Some when someone who has most of their money in real estate takes a hit and loses maybe 20% of their wealth in a single year the government is still going to come along and take their percentage?
The defacto result is that the government will be in the real estate business. In Chicago we had a project called the Chicago Spire. The project went bankrupt. Under a wealth tax plan everyone who lost everything would still owe the government. Is that just?
Further, in year of low inflation “the rich” may not even earn 2% on their money. Remember, you’re going to tax the cars, boats, food, dogs, & iPads of these people — all of which is depreciating. Even if their investments earn 3-4% annually they as a whole may only earn 1% on their money. Or they have a bad year in the stock market and actually lose money. These people will have an effective tax rate over 100%.
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Lastly, the wealth tax will lead to just as cumbersome tax code as we currently have. The Laffer Curve will force people to hide money overseas and in corporations. If you put corporations on a wealth tax they will simply flee in droves. Image Coke or Apple having to pay a tax for the goodwill on their trademark, it’s part of its assets. It’s crazy.
Any tax plan must be first based on determining who should pay what? See this post here: http://jamesbosco.com/2012/09/08/who-pays-what-income-taxes/
Is it really fair that anyone pays zero? Can one feel connected to their country; can they participate in the common purpose when they pay nothing? Was not JFK correct in asking everyone to do something for their country? Should not even the poorest among us pay $10-20 for the common? I think they should be proud to do so. They can hold their heads high and truthfully claim that they did their part.
“Everyone does their part” implies that everyone contributes. Being a “net taker” is not contributing. Right now our tax code fully supports the net takers. Fix that and you’re half-way to fixing everything else.
December 3rd, 2012 at 14:30
Hey Jim, thanks for stopping by. You’ve got some good points here, I’d like to answer them one-by-one.
1. I disagree with your characterization of the elimination of the EIC as a tax hike for most Americans; especially not for those making under $500,000 that would be subject to the 0% rate. Granted that if they are one of those 15-20% (I’ll assume your numbers are correct) that get more back from EIC than they pay in, they no longer have that “bonus check” to look forward to. But that is hardly the same as a raise in taxes.
I do, however, agree with your assessment that this would present some degree of difficulty in getting a measure of this sort through Congress.
2. I am aware of the constitutionality of the tax. Altman mentions this in his article as well, citing the necessity of passing a constitutional amendment as a severe roadblock.
3. Remember that this is being proposed as a replacement for the federal income tax. Under such a plan, employee wages would still be subject to social security, medicare, and unemployment payroll taxes, state and local taxes, etc.
As to how you would be taxed on your home, good question. This is a situation that many Americans find themselves in lately. I would agree that it is wholly unfair for your to pay taxes on the full value a home that you have not yet paid for, and whose value is less than what you will end up shelling out for it.
4. If a billionaire loses money on the stock market, or if their real estate grossly depreciates, or if their net worth decreases for any reason, the amount they owe in taxes would decrease in kind. If, according to your example, someone loses 20% of their net worth, then yes, they are still going to have to pay their 1% or 2% on that remaining 80% (unless of course their net worth dips below $500,000).
I agree that the prospect of someone paying an effective rate of 100% is troubling. But I think that is something that can be worked out (much like the question of your home) with a better understanding of the probability of this happening (based on actual wealth and investment demographics), the practical applications of the tax on these individuals, etc.
Again, this is being proposed as a replacement for the federal income tax, so corporate taxes would not be subject to this; it is not being purported to simplify the tax code, at least not by me; and those making under $500,000 a year would still be subject to payroll taxes, state taxes, local taxes, etc., so nobody really pays zero.