Wealth taxes in America
I’ve been reading and thinking about the idea of wealth taxes. In principle, it’s an idea I could support. Too much wealth is controlled by too few in America today.
The chief argument I see made against wealth taxes is that they’re impractical. In a literal sense, this is easily falsified. We already have some targeted wealth taxes. Most of us pay them.
The most obvious wealth tax is real estate taxes. Homeowners pay them every year, and much of the money is used to fund local schools. The problem with real estate taxes is that they are highly regressive. For homeowners, property taxes are based on an assessment of the home’s value. But if you have a mortgage, you pay the full tax even though your equity in the house is less than the full value. And renters pay property taxes—your landlord passes their taxes on to you in your rent, even though you gain no equity through rent payments.
You may also pay personal property taxes on, e.g., your car, which is also a wealth tax, since it is assessed based on the car’s market value.
My point here is that we have some form of limited wealth tax already. The challenge becomes creating a progressive wealth tax that meaningfully discourages excessive* wealth accumulation like yachts, multiple homes, etc.
*Libertarians will ask how much wealth is excessive. I don’t know what a consensus would look like, but I’d be willing to stipulate as a starting point that nobody should own more than a billion dollars’ worth of property.
The chief argument I see made against wealth taxes is that they’re impractical. In a literal sense, this is easily falsified. We already have some targeted wealth taxes. Most of us pay them.
The most obvious wealth tax is real estate taxes. Homeowners pay them every year, and much of the money is used to fund local schools. The problem with real estate taxes is that they are highly regressive. For homeowners, property taxes are based on an assessment of the home’s value. But if you have a mortgage, you pay the full tax even though your equity in the house is less than the full value. And renters pay property taxes—your landlord passes their taxes on to you in your rent, even though you gain no equity through rent payments.
You may also pay personal property taxes on, e.g., your car, which is also a wealth tax, since it is assessed based on the car’s market value.
My point here is that we have some form of limited wealth tax already. The challenge becomes creating a progressive wealth tax that meaningfully discourages excessive* wealth accumulation like yachts, multiple homes, etc.
*Libertarians will ask how much wealth is excessive. I don’t know what a consensus would look like, but I’d be willing to stipulate as a starting point that nobody should own more than a billion dollars’ worth of property.
The big objection is that there is no way to value lots of assets and get cash out of them every year. But that’s a misdirection.
All the tax authority needs is a declining basis adjustment table in the code so that the effective tax rate rises as the holding period lengthens. And the adjustment could even go negative–it’s just arithmetic.
This routine would be as effective as the rest of the code and just as unavoidable. John
Perish the thought Doctor, tax the wealthy. Sin taxes don’t work
The trouble with property taxes are they are misspent. Caught up in whatever: politics, grift, graft, the money isn’t being spent on the schools and infrastructure. Though not Proper I live in what could be counted as the heart of the third largest metro in the country and ((( the roads are better in Mississippi )))
We need to change our priorities …
I don’t get the example here of yachts. The design, construction, operation, maintenance of these vessels all create taxable activity well in excess of say holding cash or bonds would. Yes, please build yachts, makes better fiscal sense than creating a tax with a goal of no more yachts. The “multiple houses” example also feels kind of off since it’s a category already subject to wealth taxes as explained early in the post. If Bezos buy 3 houses a day all year, you’ll tax more of his wealth than if he doesn’t.
@Eric,
Please point out where anyone said that the goal is no more yachts. Take all the time you need.
I’m sorry this is so hard for you, but the point about wealth taxes on multiple houses is to tax the supernumerary houses *more* than the primary residence.
Hope that helps.
Homestead exemptions on real estate would be good. Long ago I lived in MN and the homestead exemption cut my tax bill in half. A much larger exemption (say 75%? 90%) would do much for the housing market in NYC and other places where the wealthy have pied-a-terres or 2nd homes. In NYC, it would make them choose between giving up the pied-a-terre, paying a much higher property tax or paying state and local income taxes. On the flip side, it would allow for tax relief and increase the number of properties available for less affluent folks.
For financial assets subject to “2 & 20” fees, typically available only to the wealthy, the managers’ take could be used as the tax basis, for both wealth and income taxes.
For more liquid financial assets, those that are frequently traded, mark to market at the end of each year and tax the (implicit) gains.
@marcel,
This post appeared twice, so I trashed the duplicate.
I appreciate that, thank you. It is often hard to tell whether the click on the post button has registered, and when one misjudges in that direction, there is a (private) feeling of foolishness.
Joel, for whichever reason my comments as Reply fail pretty often. But this is a reply to yours.
I do not make the claim you want no more yachts, but your post does reference a hypothetical wealth tax system that “meaningfully discourages excessive wealth accumulations like yachts, multiple homes, etc.”. I find both the stated examples as odd. In the first case, the old joke is apropos: ‘How do you make a small fortune? Start with a big fortune and take up boating.’ There are very few activities that move money better from wealthy people to others via transactions that generate sales taxes, payroll taxes, fuel taxes, mooring taxes as boating. You can make a similar case for most consumption, but collections of art, wine, rare books are more economically stagnant, by a lot. If I were a taxing authority in a place like Rhode Island, as an example, discouraging yachts would not be attractive, at least compared with other options.
As for houses, again the post itself explains that wealth taxing houses already exists and doesn’t need difficult legislation or probable constitutional review. So if the wealthy chose to buy more houses, it’s at the price of paying more taxes. Buy as many as you want! Mayor Mamdani isn’t taxing pied-a-terres to end the practice, but to raise cash.
@Eric,
LOL! I just scrolled down to your comment “creating a tax with a goal of no more yachts.” My post describes a tax system that *discourages* the *accumulation* of yachts, it doesn’t express the goal of abolishing them. As for housing, you manage to miss the point again. Yes, of course all houses owned by the wealthy will be subject to property taxes. A wealth tax would subject houses not the primary residence as subject to an *additional* wealth tax. Again, nobody claims Mamdani is trying to abolish pied-a-terres. He wants to discourage them in order to make more housing available to others, in addition to raising cash. Both are true.
The point of a wealth tax would be to discourage the accumulation of massive wealth. Of course, it would also raise cash.
Hope that helps.
Private property is a government service, so a wealth tax makes sense. Most of the wealth is in government issued currency, government chartered collectives, government allotted real estate or government protected intellectual property. Now that paying subscriptions for what one “owns” is becoming more mainstream, we’ll start seeing the government charging heavier users of its services more. Alternatively, the government could just set a limit and consider only the first so many millions in assets under its protection and encourage criminals and fraudsters to go after those assets beyond some base amount.
Just a reminder of Liz Warren’s 2% wealth tax: Ultra-Millionaire Tax
One of her claimed benefits is that it supports the estate tax in later years.
@Jim,
I’m consistently impressed by Warren’s wisdom.
In re: inheritance taxes, I believe they should be taxed as income from the first dollar. Same for capital gains.