Over the next several posts, I will explore alternative tax systems that the US government might consider. I won’t touch on much discussed options like the flat income tax, federal sales tax, or minor tweaks to the existing tax code. Instead I’d like to examine some different ideas, like wealth (property) taxation, gross receipts taxation, pollution (Pigovian) taxes, and financial transaction taxes. Can any of these constructs find a meaningful place in the US federal tax code? Can they improve on the current system by bringing greater simplicity, a broader tax base, better incentives, or all of the above?
What are we up against?
2013 Federal revenue = $3 Trillion, of which:
- Personal Income taxes = 1.4 Trillion
- Corporate income tax = $333 Billion
- FICA + UI taxes = 1 trillion
- Capital Gains Taxes ~ $100 Billion (included in personal income taxes)
Any system proposed in this series must make a significant contribution, while decreasing the economic friction and deadweight loss caused by taxation. For these purposes, we’ll define “significant” as $100 Billion or more — on the same order as current capital gains taxes.
Today’s Idea: A Federal Net Worth Tax
The idea of taxing an individual’s net worth is not without precedent, as the state of Florida levied a similar tax from the 1930s through 2007. Property taxes are also the single most common tax source used by counties and municipalities nationwide.
While real property (real estate) taxes are common nationwide, taxation on other forms of property is very rare. This appears to be a historical artifact, as real property holdings once equated closely with net worth. Since the majority of US net worth is no longer real-estate related, property taxation casts a relatively narrow net today. A broad-based tax on net worth at a very low rate might generate significant revenue without unduly burdening capital holders. Reducing capital gains rates as a partial offset would make the new tax more palatable. Another advantage of such a tax is that it could be automatically remitted from financial accounts (e.g. brokerages, bank accounts) annually, eliminating any administrative overhead for individuals.
Running the Numbers
The total net worth of US households rose to $80 trillion by the end of 2013.
A tax of 0.25% of net worth would yield $200 Billion annually. Reducing long term capital gains rates to 10% might reduce capital gains revenue by $50B, but this would offset any risk of capital flight from the United States. Exempting the first $100,000 in net worth would eliminate the tax burden for approximately 60% of Americans, without materially impacting revenue (given the level of wealth inequality in the United States today).
The net worth tax (with capital gains reduction) would thus provide roughly $150 Billion in incremental revenue, which could be used to reduce income taxes on individuals, corporations, or both.