Wealth Tax
Elizabeth Warren wants to levy a wealth tax on anyone worth more than $50 million. She was smart enough to get a job teaching at Harvard Law, but she is not smart enough to understand wealth.
That’s easy, you say. Wealth is money. No, it’s not. Wealth is mostly perception. An American dollar will buy you something to eat almost anywhere on earth. You might have to go to a town and find a money changer, but you will eventually get a snack. A Venezuelan bolivar probably won’t buy much of anything anywhere, even less in the time it takes you to read this sentence. Paper money is paper plus perception. How about a house? In Silicon Valley, a dingbat house trades for something in excess of $1 million. In Detroit, you can get a better build house (somewhat vandalized) for nothing . . . if you promise to pay property tax. Gold! Gold has been valued for thousands of years. It is shiny and too soft for tool making. Its value is based on scarcity. If the ice caps melt and reveal large and easily accessible veins of gold, the value will greatly diminish in a heartbeat.
How do you go about taxing wealth? Which wealth do you tax? Let’s take the wealth of our newest celebrity, Jeff Bezos. He’s worth somewhere around $140 billion. Most of it is Amazon stock. For a lot of years, Amazon booked little or no profit, but the stock price increased because punters projected that he would make big money in the future. Recently, the earnings have appeared and the stock price went flat. Then, the stock price took a big hit because India implemented a regulation that might stunt Amazon’s sales there. So . . . should we be taxing expectations or the projected impact of regulations? Which day of stock activity should the tax man pick? If Bezos ossifies like GE or commits fraud like Enron, the perceived wealth will melt. Does he get a refund in that event?
Some rich people collect art. Who gets to decide the value? What are the comparables? Given my regard for most contemporary art, I’d value the frame. Will the IRS staff up with art critics? What would be the qualifications for the position? How many units of art history?
Let’s look at a case study. Say that everything of “value” I own consists of apartment buildings bought a long time ago, that now appraise for $50 million, and have been fully depreciated for tax purposes. Liz wants me to pay 2% of my 50 or $1 million in wealth tax. I’ve already paid about 40% tax on cash flow generated by the apartments and I don’t have $1 million in cash. So, I have to sell $1 million of units to pay the tax. But . . . capital gains tax, recapture of depreciation and state tax will cost me about $500,000. So . . . I have to sell a second set of units to raise the other 500. That leaves me with $48 million of real estate and $1 million cash. Am I now exempt from the tax?
We are now back to the critical questions: What is wealth and how is it created. From about 10,000 years ago, when we started farming, until a few hundred years ago, wealth was a basically fixed amount of physical things — fertile land, livestock, gold, silver and gems. Most folks scratched a meager living from the land and the aristocrats fought over the “wealth” and control of the peasant population whom they could tax. Capitalism came along and created new wealth. Most everyone was thereby eventually freed from peasant servitude
Wealth creation is an idea that is successfully executed. If I think up a product or service, and find a way to bring it to market, I have something for sale. If you tender to me something I value in return for my product or service — usually the fruits of your labor in the form of paper currency or an equivalent accounting entry — wealth has been created. I can keep accumulating wealth until somebody steals my idea or comes up with a better idea and/or execution. That process transformed humanity from a subsistence existence into unimagined prosperity. We tax cigarettes in order to get less smoking. Do we want to tax wealth in order to get less of it?
Government needs to tax something in order to operate. The least destructive taxes are on consumption. User fees are the most efficient, because the service and the cost are directly related. If we want to transfer money, tax revenue can be sent to those who make little or no money. We should certainly be enforcing anti-trust laws and carefully regulating vendors who exploit the regulatory state to enrich themselves. We should tax inheritance in a fashion that does not destroy small businesses that pass from generation to generation, but discourages the formation of dynasties. Aside from that, we should be rewarding those who come up with a good idea and bring it to market. We all benefit from that process. A wealth tax is a dumb idea!
