Paul L. Caron

Wednesday, November 27, 2019

Most Wealth Taxation Is Voluntary; We Need To Make It Mandatory

Washington Post op-ed:  Most Wealth Taxation on the Rich Is Essentially Voluntary. That Must Change., by Jared Bernstein:

As a result of the Democratic primary, we’re having a robust debate about taxing wealth. The debate invokes tricky technical and legal issues, but it’s an overdue one: There are good reasons the United States needs to start taxing wealth.

You may think we already tax wealth, but that’s mostly not the case. As my colleagues at the Center on Budget and Policy Priorities, Chuck Marr, Samantha Jacoby and Kathleen Bryant, point out in an important new paper [Substantial Income of Wealthy Households Escapes Annual Taxation Or Enjoys Special Tax Breaks], for the very wealthy, taxes are essentially voluntary.

How can that be, when the rest of us have taxes withheld from our paychecks every few weeks, and then often pay more when we file our income taxes every April? Because wealth accumulation isn’t taxed unless you decide to sell the asset, and even then, it’s taxed at a favorable rate, compared with regular income.

The new paper provides the following true-life example from the vaults of Warren Buffett (who, to his credit, has long supported higher taxes on the wealthy): “The value of Buffett’s main asset, Berkshire Hathaway stock, rose over 17 percent in 2010, from approximately $34.8 billion to $42 billion. These figures imply income of roughly $7.2 billion. Yet in his tax returns for 2010 … Buffet’s adjusted gross income was $62.8 million, or less than 1 percent of that amount."

In other words, asset appreciation, by far the main source of income for the billionaire class, isn’t taxed at all unless it is “realized” through a sale. Because of this, at least outside of bear markets, billionaires’ tax bills will almost always be a mere few percent of their gains in wealth. My colleagues point out that Amazon founder and chief executive Jeff Bezos’s “tax bill on a decade of stock sales likely was about $1.5 billion, or less than 1.5 percent of his [$100 billion] increase in wealth due to the appreciation of his Amazon stock.” (Bezos owns The Washington Post).

That extreme concentration of wealth is slowing growth, corrupting politics and blocking opportunity for the many on the wrong side of the inequality divide.

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Byron Rambo: The idea that a preferential rate for capital gains encourages investment has been pretty much debunked. Here's a Reuters piece that goes into some detail on that issue:

Posted by: Gerald Scorse | Dec 1, 2019 11:25:28 AM

Wealth taxes come and have gone: what do you propose when a capital asset's value declines, issue a refund? Capital gain tax treatment is in place to encourage investment, what do you propose investment will bee when there is no setoff to risk? Let's just call this the "jealous tax"; I am jealous of what you have earned, saved, and invested and I believe you should give it to me even though I didn't.

Posted by: byron rambo | Nov 30, 2019 3:25:52 AM

I'm enjoying the debate over a plainly unconstitutional tax.

Posted by: Mike Livingston | Nov 28, 2019 2:57:49 AM

Bernstein's article talks in the main about unrealized capital gains. Another huge problem is unreported income by self-reporters: people who don't get W-2s, but instead report their own figures on their tax returns, unverified by any other source.

A Washington Post op-ed co-authored by Lawrence Summers and Natasha Sarin had this to say: "Our rough estimates suggest that at least 70 percent [of the tax gap] comes from underpayment by the top 1 percent."

Here's a link to that piece:

Posted by: Gerald Scorse | Nov 27, 2019 3:29:05 PM