No administration of a direct tax is free from problems. But the administration of net wealth tax will be far easier than an income tax, for the same reason that it is much easier to construct a balance sheet than an income statement. Here is one likely template:
(a) The Tax Base of the Net Wealth Tax Consists of the Net Assets of the Taxpayer, Including W-2 and 1099 Income for the Calendar Year, Excluding Personal Assets Such As Home Equity and Personalty To a Given limit. Computation of the tax base of a taxpayer is thus rather simple for the vast majority of lower-, middle-, and even upper middle-, class taxpayers. Most people own only a few major assets - home, maybe some rental property, and a securities portfolio that is held by one or two brokerage firms (Schwab, E*Trade, Merrill, etc.). Identifying the assets and liabilities that make up the balance sheet is thus extremely simple, for most taxpayers, under an hour.
Valuation of the assets is the crux. The discussion of the issues presented by valuation will be the major subject of this blog, and the various issues presented thus way beyond the scope of a post labeled as 'basic'. Suffice it to say at this point that we will deal with the basic nightmare of taxpayers concerning a wealth tax - that a tax imposed on a base that includes a home will make ownership uncomfortable or even unaffordable - by including an exemption for home equity and personal items (car, furniture, etc.) generous enough to exclude all but the most expensive homes and personalty.
(b) The Tax Is Progressive and Imposed on the Entire Tax Base. The Maximum Rate Is Approximately 6%. As I noted in the 'Overview' post, no tax increase in taxes is contemplated. Whatever the net revenue necessary , whatever the 'X', it remains unchanged. Given that productive wealth is 5-7 times the amount of income (per Thomas Piketty and others), net wealth tax rates will be some equivalent fraction of the current income tax rates. For simplicity, I'm going to assume a maximum rate of 6%. Note that this is one tax that is truly progressive. Because of the funnel-shaped pattern of societal wealth, even a minuscule increased of the top rate produces a huge addition to revenue, more than enough to fund reasonable tax expenditures in the lower brackets.
(c) The Tax Base Includes ALL Assets of United States Citizens and Resident Aliens, No Matter Where Situated And Regardless of the Residency of the Citizen. Fleeing the tax is next to impossible, without renouncing citizenship and transporting assets off-shore - steps so drastic that very few individuals would undertake them. Since the maximum rate is only 6%, motivation is also lacking.
(A tax at some rate will also be imposed on domestic assets held by foreign nationals residing abroad. The complications of that are beyond the scope of this post.)
(d) Rate Structure. Obviously detail on rates depends on a socio-econometric study of rates that is way, way beyond anything a blog poster could undertake. But for the sake of doing computational examples, assume the following: 1% for wealth between 0 to $100,000, 2% on the base between $100,000 and $500,000, 3% on the base between $500,000 and $1,000,000, 4% on the base between $1,000,000 and $5,000,000, 5% on the base between $5000,000 and $10,000,000, and 6% on wealth of $10,000,000 and more.
There is no change in FICA and social insurance tax rates, which are not affected by the change in the tax schemata.
The Annual Net Wealth Tax will be supplemented by an estate tax that is similarly aggressive. The rate structure of that is beyond the scope of this article. I will discuss the social purpose in a subsequent post.
(e) Examples. The following six examples illustrate how a Net Wealth Tax would be computed. (In all cases home equity and personal items are exempt and disregarded).
(1) Two young married medical professionals finish residency and begin professional practice. Neither has any inherited wealth. Both have student loans of approximately $150,000. Each earns $300,000 in the first year of practice. I'm going to assume for purposes of these examples that each is taxed individually, i.e, joint returns are not permitted. (As a practical fact, taxation of marital wealth is a huge, but resolvable, issue.)
Each of the young marrieds owes a tax of $2,000, or a total of $4,000. The tax base is $150,000 ($300,000 income added to the asset base, minus $150,000). Each young professional pays 1% on the first $100,000, or $1,000, and 2% on the balance of $50,000 over $100,000, or another $1,000 - $2,000 each,
Comment: This is the paradigm case for the Net Wealth Tax. The tax burden currently imposed on upwardly mobile individuals is shifted to persons with lower income and greater wealth. As the couple matures and accumulates wealth, the burden shifts gradually to them.
(2) A middle aged attorney professional investor has accumulated net assets of $10,000,000. He has a professional income of $250,000 and - because he invests aggressively and acutely - investment income of $1,000,000. His tax base is thus $11,250,000 (professional income, plus investment income, plus asset base.)
He owes a tax of $429,000 ($1,000 on the 1% bracket, $8,000 on the 2% bracket, $15,000 on the 3% bracket, $80,000 on the 4% bracket, $250,000 on the 5% bracket, $75,000 on the 6% bracket [$1,250,000 - the amount in excess of $10,000,000 - x 6%]).
Comment: This is the paradigm of a professional investor. Note that the investor's net wealth increases by approximately $500,000. There is quite a bit of motivation for wealthy investors to diversify into investments that offer a return greater than 6%.
(3) A middle-aged charitable worker has inherited an estate of $100,000,000 net. She is disinterested in commerce and invests in coupon bonds that produce an annual return of 4%. Her tax base is thus $104,000,000.
She owes a tax of $5,994,000 ($354,000 on the bottom five brackets, plus $5,640,000 on the assets in excess of $10,000,000 [$94,000,000 x 6%]).
Comment: Finally, this is the paradigm of the fortunate individual with substantial inherited wealth. I have no quarrel with the motives or life choices of the individual. She may be doing important social work of a type that can only be done by someone who has no need to make a living. But at the end of the day, the brutal reality is that she has been blessed with a life choice not available to people who have to make their own way through life. It is also the case that the simple retention of wealth creates barriers for the energetic and upwardly mobile. Shifting the tax burden from them to her makes social and moral sense, no matter how laudable her motives and ethics.
(4) A Californian nurse retiree owns a rental property that produces $60,000 in gross rental income annually. However, the net income is reduced to $0.00 after conventional GAAP accounting, including an allowance for depreciation reserve. Valuation methods for this type of asset are a major issue that is too lengthy for this post. For now, assume the valuation is the same as the Proposition 13 valuation that California sets by law - in this case, $1,000,000. The property is secured by a mortgage of $500,000. In addition to her rental income, she receives a social security benefit in the amount of $30,000 annually.
The nurse will owe a tax of $9,900 ($9000 on the first two brackets, plus 3% of the assets over $500,000 [$30,000 x 3%]).
Comment: Ordinary GAAP principles are not lost in this scheme. We WILL compute profit-and-loss on the basis, including depreciation and depletion allowances. But the actual valuation of assets will deviate. It is the practical fact that a great many theoretically wasting assets, particularly real property, are actually appreciating. In the case of real property, valuation will almost certainly be based on the value used for local property tax assessments.
(5) An older investor has accumulated assets of $1,000,000,000. Her hobby is collecting the art of old masters. Her collection is valued at $200,000,000. She is conservative with her investments and achieves a 6% return on her productive assets, or $48,000,000.
The investor will owe a tax of $62,634,00 ($354,000 on the bottom five brackets, plus $62,280,00 on the assets in excess of $10,000,000 [$1,038,000,000 x 6%]).
Comment: The networth of this taxpayer decreases by $14,000,000 because of the large holding of non-productive assets. The valuation of art and other collectibles - what we might call 'non-productive stores of value' - poses some interesting problems that will be the subject of considerable discussion in the posts to follow.
(6) A youthful technologist has founded a technology company that has gone public. His stock holding in the company is worth $1,000,000,000, even though the company is actually still reporting losses in the short term.
The technologist will owe a tax of $59,754,000 ($354,000 on the bottom five brackets, plus $59,400,000 on the balance over $10,000,000 [$990,000,000 x 6%]).
Comment: This is another paradigm, illustrating some fairly seismic changes in valuation that a Net Wealth Tax would produce socially. Obviously, the young technologist does not have $60,000,000 needed to pay the tax. Equally obviously, there is no willing buyer for even a fraction of his holding. This raises the brutally realistic question as to what the worth of the stock actually is.
At the present time, however, even though the stock may never pay a dividend and is too highly priced for a cash acquisition, the young investor can turn the stock into hard cash or other assets by selling into the market on a greater fool theory, pledge it as collateral, etc. All that changes - radically - in good ways and bad - if a tax is imposed on the actual asset value of the holding.
This, then, is basic administration of the Net Wealth Tax, and a preview of some of the major issues.
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