Good morning,
As I indicated last month, I’m going to try each Monday for a while to propose a simple policy concept or concepts to address a problem that one might think could garner widespread support. Yet, in many cases the political environment and the vested interests likely make these simple suggestions unviable. To be clear, my ideas are not the only ones—they simply offer a few different ways of addressing certain issues. There are other reasonable steps that can be taken but, sadly, few of these are seriously considered.
TAX THE RICH!
There is a mantra that “The rich don’t pay their fair share of taxes.” And to a point that’s a fair comment. But, to be clear, we do tax those who are at the upper end of the income scale, as measured by ordinary income. Indeed, in California and other high tax states, those in the highest tax bracket find themselves in a tax bracket that amounts to over 52% per annum. And this doesn’t include the other taxes—like property taxes, gas taxes, sales taxes, and other taxes. While we probably could increase the tax on incremental earned income a bit higher, it doesn’t resolve the core problem, which is that many people pay little tax or that those who depend upon income from assets pay a lower tax rate.
TAXING WEALTH
Much of the discussion these days has been about how we might tax wealth, rather than income. I think a lot of congressional debate and posturing and millions of column inches will be devoted in news and op-ed columns to this idea. I think it’s a non-starter for myriad reasons, including:
It likely isn’t constitutional. As opposed to taxing economic activity, it feels like a taking or a bill of attainder. We’ll be fighting for years.
It would “punish” small businesses that have value but haven’t elected to sell those businesses. A wealth tax would require generation of cash to fund taxes.
It is difficult to value many assets. How does one value a piece of art? Or a copyrighted book, song or lyric?
How can this be done annually and what will the methodology be?
The IRS has insufficient staff to audit the (relatively) simple review of income-based taxation. How can it possibly monitor, audit and value assets?
A far better inquiry is how we can address inequities of the system through reviewing (a) the rates at which we tax, (b) the differences in the tax rates for the things we tax, and (c) the activities we tax.
TAX WEALTH INDIRECTLY
Taxing people for the things they own, besides likely being unconstitutional, seems wrong. Property taxes are taxes that translate into paying for benefits local governments provide to property owners. But the major means of federal and state governments financing their spending has been the taxation of transactions and the taxation of income. Do more business or make more money and you pay a tax. The question really is how best to tax transactions and income in a way that can lead to greater fairness and more revenue. We ought to be thinking about taxing consumption, as well. I would suggest several things:
Tax capital gains at ordinary income rates. Intellectuals and economists already have pointed out the seeming unfairness of taxing capital at a rate lower than the rate at which we tax labor. Besides its inherent unfairness, it is terrible optics in a time when the middle class is under siege. Without discussing the specifics of the argument for the capital gains break, one reasonably can consider that the break should exist for smaller taxpayers. Perhaps provide the first $1MM of capital gains be taxed at a lower rate and then acknowledge that capital gains is the primary source of income for the most wealthy.
Create additional tax brackets. Progressive tax rates have been part of our system for years. The top rate begins at a level paid by a partner at a law firm all the way to Elon Musk. There is little logic for the federal government not to take a bigger “take” from the outrageously high income of the super-rich. A series of additional tax brackets should be added as we go higher up the income scale.
Institute a value-added tax (a “VAT”). This is a major source of income for European governments. What it does is tax transactions. The wealthy spend more money on more “stuff.” We should tax the “stuff.” If we exempt food, pharmaceuticals and energy costs, it will not be regressive, but be more progressive in its application. Importantly, it does not penalize savings—instead it provides that transactions along the supply chain are taxed at the value-creation level. Here’s an article from CNBC regarding the oddity that the United States is among the few developed nations without a VAT: https://www.cnbc.com/2021/06/21/this-tax-brings-in-billions-worldwide-why-theres-no-vat-in-the-us.html. And here is Bloomberg explaining the issue: https://news.bloombergtax.com/daily-tax-report/the-united-states-needs-a-value-added-taxhttps://news.bloombergtax.com/daily-tax-report/the-united-states-needs-a-value-added-tax
Have a great day,
Glenn
From the archives:
Unfortunately the groundswell for a Flat Tax at all stages of consumption passed us by after Reagan left office. The problem with the European VAT is that their governments keep "uping" the number.
Don Norberg