The tax-and-spenders of the world are desperate to find new ways to pay for the crumbling welfare states of western democracies. And they’re targeting the “rich” to do it.
Senator Elizabeth Warren (D-Massachusetts), a 2020 presidential candidate, has proposed a 2% annual tax on assets of households with a net worth of $50 million or more. The tax would increase to 3% for billionaires.
Warren’s policy team estimates the wealth tax would raise an astonishing $2.75 trillion over the next decade. She suggests the tax would be a good way to start paying for proposals such as “Medicare for All.”
Some of the wealthiest people in the world support the idea. A public letter signed by George Soros, Facebook co-founder Chris Hughes, and the daughter of billionaire Charlie Munger calls for a wealth tax to “help address the climate crisis, improve the economy, improve health outcomes, fairly create opportunity, and strengthen our democratic freedoms."
The mechanics of a wealth tax couldn’t be simpler. You prepare a balance sheet of your worldwide assets. Then, you subtract an exempted amount, say $50 million. You then multiply the difference by 2% or 3%.
Wealth taxes advocates say the idea rewards hard work and penalizes non-productive investments. And it rewards productive investment and penalizes unproductive investment.
This, of course, is nonsense. Every dollar of wealth tax collected is unavailable to invest in new factories, new technologies, or anything else. Like all taxes, the money goes into the hands of bureaucrats who think they know better than you do what should be done with your money.
You might find it hard to feel sorry for the 0.01% of Americans who would have to pay the wealth tax, but it’s fundamentally unfair. Under Warren’s proposal, if you have a net worth of $100 million, you’d need to pay $1 million annually in wealth taxes ($50 million subject to wealth tax multiplied by 2%) in addition to the income taxes you already pay. If the $50 million is invested in non-income-producing assets, you’d pay $1 million, with no offsetting income.
If, for example, your assets are primarily real estate that doesn’t generate income, you are penalized for accumulating property. How fair is that?
On the other hand, if you invest the $50 million in 30-year Treasuries yielding 3%, you’ll generate $1.5 million in income annually. You pay $1 million in wealth tax plus income tax at a 37% rate ($555,000 total) for a total tax of $1.55 million.
Congratulations! Your net loss is only $55,000.
If you’re not wealthy, it’s tempting to rationalize a wealth tax by saying, “I’m not rich. A wealth tax could never affect me.”
Don’t fool yourself. Once a wealth tax is in effect, Congress can set it to whatever threshold is politically expedient. In France, before it was abolished, the government applied the “solidarity tax” if you had a net worth exceeding €1.3 million. In Switzerland, where wealth taxes are imposed on residents by each of the country’s 26 cantons, the threshold is sometimes as low as CHF 100,000 – about $101,500.
There are problems with wealth taxes. One issue is that they’re expensive to administer and don’t raise much revenue. They also tend to drive wealthy people out of the countries that impose them. That’s why while 12 European countries had wealth taxes in 1990, and only three do today: Norway, Spain, and Switzerland. France ended its wealth tax in 2018, after more than 40,000 millionaires left the country between 2000 and 2012.
Another problem is that assets subject to a wealth tax seem to “disappear.” In Switzerland, a 2016 study concluded that for every 0.1% increase in the wealth tax rate, the assets reported to tax authorities decreased by 3.5%.
Proponents of a US wealth tax think they can ensure that wealthy citizens can’t avoid it by leaving the country or hiding their money. European countries impose worldwide tax only on their residents. After a sustained period of non-residence, generally one year or longer, individuals end their liability to pay tax on their worldwide income.
But the US requires all citizens, no matter where they live, to pay tax as if they never left. If you’re a US citizen, you can’t avoid taxes simply by moving abroad. The only way you can permanently end your tax obligations to Uncle Sam is to expatriate – give up US citizenship and passport. What’s more, if you have a net worth greater than $2 million, you must pay an “exit tax” on any unrealized gains above a certain threshold ($725,000 for 2019). Depending on the type of asset and how long you’ve held it, the exit tax could be as high as 37%.
That’s not enough for Senator Warren. If her wealth tax plan becomes law, she’d confiscate 40% of your wealth above $50 million if you expatriate. Naturally, that number could be dialed down to whatever level Congress dictates. That would effectively lock you in if you’re wealthy enough to be subject to whatever threshold applies for the tax.
But even if Senator Warren succeeds in keeping billionaires from expatriating, she’ll face the same problem Switzerland’s cantons have experienced: finding the assets to tax. Fortuitously, economist Thomas Piketty, who believes Warren’s wealth tax proposal is as “American as Apple Pie” has the answer. He and a group of like-minded Bolsheviks want to create a “global asset registry” (GAR) that would use blockchain technology to track all assets worth more than a specified value possibly as low as $10,000.
According to their proposal, A Roadmap for a Global Asset Registry, the GAR would “prove a vital tool against … removing legitimate income and profits from the economy in which they arise for tax purposes.” A GAR would thus prevent wealthy individuals in such paragons of freedom as Greece, Argentina, Russia, and Saudi Arabia from squirreling away their assets offshore.
The proposal suggests the GAR should be considered a logical next step to initiatives taken by the Organization for Economic Cooperation and Development to facilitate “tax transparency.” One such initiative is the Common Reporting Standard (CRS), which mandates the automatic exchange of information from financial institutions in one country to tax authorities in the country of residence of their clients. More than 100 countries have already adopted the CRS.
Another initiative the Roadmap endorses is public registries of beneficial ownership of companies and trusts, which it refers to as the “emerging international standard.” The idea here is that everything you own should be a matter of public record, accessible to anyone with an internet connection. The Roadmap claims this utopia will “end wealth secrecy.” To make certain that no one is overlooked, the Roadmap suggests that every person on our planet be assigned a “global individual unique identifier.”
The Roadmap acknowledges that some people will oppose a GAR since it could give extortionists, kidnappers, and other criminals a laser-focused blueprint to identify the most lucrative targets. That’s not a problem, according to the authors, because “The right to privacy is not an absolute right.” And if you’re wealthy but have decided to live below your means so as not to be a target…well, too bad. As the Roadmap states, “After all, the GAR, as much as any policy measure, involves a trade-off.”
Right now, Senator Warren’s wealth tax and a GAR to enforce it are only proposals. But if they come into effect, they will spell the end of financial privacy for everyone. There will be nothing to stand in the way of the government seizing whatever percentage of your wealth is politically expedient.
As I’ve said many times before, maybe it’s time to consider your Plan B.
