September 27, 2019

TAX WHAT YOU DON'T WANT:

Elizabeth Warren's Wealth-Tax Trap (VERONIQUE DE RUGY, September 26, 2019, National Review)

A main problem with her tax is that the net worth of a rich person isn't as straightforward as proponents of wealth taxes would like you to believe. Net worth includes all assets, some of which are easier to value than others. The value of assets such as stocks, bonds, and real estate are pretty easy to measure. But many other assets -- such as cryptocurrencies, trusts, and private businesses -- are harder to assess.

That's why wealth taxes are always so hard to administer and so easy to avoid. It makes them a terrible vehicle for raising money. And it explains why many governments used to have a wealth tax but few still do today. According to a paper by Daniel Bunn of the Tax Foundation, "the number of current OECD members that have collected revenue from net wealth taxes has grown from nine in 1965 to a peak of 14 in 1996 to just four in 2017." He adds that "among those four OECD countries collecting revenues from net wealth taxes, revenues made up just 1.45 percent of total revenues on average in 2017." Yes, it is a difficult tax to collect.

France was one of the four countries that had a wealth tax in 2017, but it dropped the tax in 2018. (Belgium adopted its own wealth tax, meaning that the total number of countries with a wealth tax today is still four.) I would think that if the French government -- of all governments! -- dropped the wealth tax, that should be a powerful clue that the levy isn't all that Warren dreams it will be. But apparently the senator thinks she can avoid any problems by implementing anti-avoidance measures such as a repressive 40 percent exit tax on any targeted household that attempts to emigrate, minimum audit rates, and increased funding for IRS enforcement. Warren clearly doesn't believe in freedom from persecution.

But there are deeper problems with a wealth tax. First, there seems to be a profound misunderstanding of what wealth is and where the money will come from. Listening to politicians who support the levy, you get a sense that rich people use their wealth almost exclusively to fund extravagant consumption. Tax their wealth and these rich people will simply downgrade their houses -- and still be left with gigantic palaces -- or otherwise reduce their unnecessary consumption expenditures.

Yet nothing could be further from the truth. Instead, that wealth is tied up in other wealth-producing activities. It's invested in companies; it is used to fund R&D that will create better goods and services for consumers; it is the capital that innovators and producers borrow from banks to grow their businesses.

Indeed, if we consider the threshold question of what an economy is, it seems fair to say: the point of an economy is to create wealth.  Obviously then, we ought not tax the creation of wealth or wealth itself, which is counterproductive by definition.  Instead, we ought to tax consumption, not least because it will force people to tie up their wealth in wealth-producing activities, a virtuous feedback loop.

Posted by at September 27, 2019 1:23 PM

  

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