A Flat Wealth Tax is Fairer & More Painless Than An Income Tax
Why We Should Replace Income, Gift & Estate Taxes With A Flat Wealth Tax
By David Grace (Amazon Page — David Grace Website)
This column is a short-form explanation of how a flat wealth tax would work and why it would be superior to funding the government with an income tax, a gift tax and an estate tax. To see a more detailed discussion of this tax plan check out my 2017 column:
With A Wealth Tax, The Gov’t Is Paid Last Instead Of First
With an income tax the government is paid first, before you ever get your wages, and you have to live on whatever is left over after the government has taken its share.
With a wealth tax, the government is paid last, after you have received your earnings and the government gets its share from whatever is left over after you have paid your other bills.
Less Painful Taxes
A wealth tax that is paid last and does not decrease your disposable income is far less painful than an income tax that is taken from your pay before you ever see it.
A Wealth Tax Is A Flat Tax
The income tax is a graduated tax with different levels of taxes on different levels of income. This always leads to controversy about where the brackets should change and how much the percentages for each bracket should be.
A wealth tax is a flat tax based on your net wealth above some floor amount. Whether that taxable amount is $1,000 or $100,000,000, the tax percentage is the same for everyone, somewhere between 2% and 3%.
For Most People The Tax Returns Would Be Simpler
In order to avoid trying to value clothing, furniture, used cars and other relatively low-value items, the first $XXX of everyone’s wealth would be exempt. That number would probably be someplace between 50% and 200%. of the median household income. If that percentage was set at 100%, the floor would be about $60,000 so anyone whose assets had a total net value of less than $60,000 would owe no federal tax at all.
Since wealthy people already maintain detailed records on their stocks, real estate, and other investments, a wealth tax would not require a material increase in their paperwork. By eliminating all the complex income-tax rules relating to income-tax deductions, the actual tax returns should be far simpler.
Elimination Of Most Income Tax Loopholes
No longer will ordinary people who are living paycheck to paycheck pay a higher share of their income as taxes than wealthy people who qualify for esoteric loopholes. At 2.5%, if your net wealth above the floor amount is $200,000 your tax is $5,000. If your net wealth is $1,000,000 your tax is $25,000. If your net wealth is $1 Billion, then your tax is $25,000,000. If your wealth declines, your tax goes down. If it increases, your tax goes up, and if you have no net assets over the floor amount, you owe no tax at all.
Additional Individual Freedom
Under a wealth tax you can earn as much money as you want. Everyone’s take-home pay will be greater. There will be no disincentive to earning more money. You can spend as much as you want. Those who have accrued wealth will pay to run the government at the same flat rate no matter how little or how much wealth they have.
No Gift or Estate Taxes
Because there is no tax on income you can give your money away without either you or the recipient paying a tax. If you want to give money to your children, you can do it tax free.
Also, forget the estate tax. Upon your death your assets will transfer to your heirs free of any estate tax, less the amount of any liens for accrued and unpaid annual wealth taxes. Because those assets will make your heirs richer, tax revenue will not be lost but rather that inherited wealth will be included in the calculation of your children’s taxes next year.
Your Annual Tax Payment Would Be Limited By Your Income
Because you can’t pay a tax if you don’t have any income, the annual payment of your wealth tax would be capped at some percentage of your adjusted gross income with the unpaid balance of the tax delayed until you sold some asset or you died.
The cap would work something like this: The government would subtract from your adjusted gross income an amount somewhere between 50% and 100% of the U.S. median household income. Right now, the U.S. median household gross income is about $60,000 so the gov’t would subtract somewhere between $30,000 and $60,000 from your adjusted gross income. Suppose that percentage was set at 75% of the median household gross income or $45,000.
Your annual tax payment would be capped at 25% of the excess so if your adjusted gross income was $145,000 your maximum required wealth tax payment this year would be $145,000 — $45,000 X 25% = $25,000.
If your net taxable wealth was $2,000,000, e.g. the net value of your home, and the tax rate was 2.5% you would owe a tax of $50,000.
Based on your income of $145,000 you would pay the required minimum of $25,000 now, about 17.25% of your adjusted gross income, and the other $25,000 would become a lien on your home that would be payable when you sold the house or you died. It would bear interest at the federal T-Bill rate in effect at the date that the lien was created.
Similar To A Reverse Mortgage
Think of a wealth tax as a variation on a reverse mortgage.
A reverse mortgage doesn’t require any monthly payments. Instead the interest accrues and is added to the unpaid balance. When you finally sell your house or you die, then the entire amount of principle and the accrued unpaid interest comes due.
In this example, that unpaid $25,000 tax becomes a lien on your house that would be payable, like a reverse mortgage, when you sold the house or you died, at which point, being dead, you wouldn’t much care anymore.
Another benefit is that the amount of the unpaid tax lien would decrease the net value of your home so as the amount of unpaid tax liens increased, the amount of your wealth and therefore the amount of your annual wealth tax next year would decrease.
Corporations & Trusts
A good deal of planning would have to go into how to handle wealth owned by artificial entities. A trust or closely-held corporation would probably be directly obligated to also pay a wealth tax so that transferring hour money to such an entity would not prevent payment of the tax.
Charitable trusts would require a policy decision. In general, any trust, charitable or otherwise, whose beneficiaries were not members of the general public would probably also have to pay a wealth tax. A charitable trust whose beneficiaries were members of the general public and not related to the person who funded the trust might be taxed at a lesser rate, perhaps half the wealth-tax rate applied to individuals.
Lots Of Work To Do
Actually creating a working wealth-tax system would require a great deal of planning. We would need to anticipate and counter the tactics people would use to evade the tax.
We would need to perform financial modeling to determine the most effective percentages for the exempt-wealth floor, the calculation of the annual income-related payment cap, payment rules dealing with how much of the net proceeds from the sale of an asset subject to a lien would go to the government and how much would remain with the taxpayer, and dozens of other practical and policy decisions. But all of that is doable.
Possibly the best way to begin would be get a small-population state that has a state income tax to switch to a wealth tax and closely monitor what happens over the first three years of operation.
I think it would be worth it because the benefits of a tax on wealth rather than a tax on income are substantial.
— David Grace (www.DavidGraceAuthor.com)
