Paul L. Caron

Saturday, May 22, 2021

Pennell: A Wealth Tax Alternative — Taxing Extraordinary Income

Jeffrey N. Pennell (Emory), An Alternative to a Wealth Tax: Taxing Extraordinary Income, 171 Tax Notes Fed. 891 (May 10, 2021):

Tax Notes Federal (2020)Asking the rich to pay more tax has been a consistent concern for politicians. Rising inequality and concentrations of wealth in the United States have caused some policymakers to question whether to reduce tax benefits that significantly lower the tax bills of high-net-worth (HNW) individuals. Suggested changes include raising the moderately low income tax rate, decreasing the federal estate tax exclusion amount, and altering or repealing the section 1014 new-basis-at-death rule. More dramatically, scholars and political candidates propose to impose a “wealth tax” on HNW Americans who often own substantial wealth but do not realize significant taxable income (as defined by the code). The most widely recognized of these proposals were advocated by Senate Finance Committee member Elizabeth Warren, D-Mass., and Sen. Bernie Sanders, I-Vt., during the 2020 presidential election season. Each advocated an annual wealth tax. Because the negative attributes of these proposals are likely to preclude their success, even if enacted, this article offers in skeletal detail an alternative, aimed at the same taxpayers but more consistent with historical taxation and less likely to fail. ...

The critique that “many Americans have vast assets but little income” raises the question of why wealth itself, invested without consumption, is an evil to be discouraged through taxation. There are only two benefits of wealth: personal consumption (either of the asset itself or of income generated by that asset) and control over that personal consumption by some other individual. As a matter of tax policy, the tax laws need not punish the possession of wealth that no one is enjoying through consumption. Merely owning the wealth does nothing to prevent others from creating their own wealth, because there is no finite amount of wealth that can be created or owned.

A wealth tax encourages taxpayers to consume their wealth in ways that have no residual value — such as by travel, literal consumption of food or beverages, or entertainment — none of which benefits society as much as investment of the wealth (which is a form of saving). It also should not matter what the form of investment is: income-producing assets, or assets such as land or art that alone produce no income.

An HNW income tax would be constitutional, and it would avoid valuation and liquidity concerns. It could be implemented immediately, administered easily under the existing IRS infrastructure, and would require little added reporting. It would need no special exemptions and could apply to any form of income (although it might be coupled with refinement of the capital gain rules). Its only significant downside is that it would generate less revenue, even if the rate imposed was high and the threshold at which it began was low. A workable tax that produces some revenue (half a loaf) is better than a proposal that in theory would generate more revenue but would not be viable in practice.

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