Here’s a brief paper (pdf) by two Berkeley economists suggesting how a “progressive wealth tax” could work. They assume a 2% rate would be applied to wealth in excess of $50 million per household, or maybe $25 million per individual. Most of us, then wouldn’t need to pay anything. The only question for the authors is the practicality of such a tax.
I was surprised to discover that, according to the paper, wealth taxes already exist in Switzerland, Spain, Denmark, and Sweden. References are cited indicating pretty good compliance, the lowest being in Switzerland (where the authors find the estimated 23%-34% evasion rate “not as compellingly identified as the other estimates.”) I didn’t review the cited papers to learn the details of how the compliance was estimated.
They note that wealthy people can hide their assets abroad, but imply that they could be caught if the government had more resources. While it’s possible for the wealthy to avoid some taxes by leaving the US and renouncing citizenship, the proposal includes a 40% tax on the wealth of the departers. They praise FATCA and recommend it be more vigorously enforced, without considering the disruptions it’s already caused (pdf) for many Americans who live or work abroad.
They aren’t concerned about the wealth tax reducing the availability of capital goods for productive use in the US, because they assume any decline in investment by Americans could be made up by foreigners, by the less-wealthy, or by government expenditures funded by the wealth tax. They don’t address the issue of what percentage of “investment” is actually productive.
They also don’t worry that the wealth tax would reduce innovation, pointing out that most innovation is done by people with less than $50 million, that innovation is enhanced by providing children with exposure to it, and that the wealth tax might encourage the rich to invest in more productive ways. Again, they aren’t concerned about the extent to which “innovation” is a good thing.
They don’t believe the wealth tax would discourage talented people from immigrating, pointing out that the government imposes lots of barriers to immigration which it could adjust if needed.
As for the impact on charitable giving, they curiously suggest that “foundations used to shelter wealth (i.e., controlled by wealthy individuals and not used for charitable purposes) should be subject to the wealth tax.” They don’t explain how such foundations could be identified, and why they are currently tax exempt.
The scariest part of the paper regards “information reporting.” They point out that the IRS already requires extensive reporting of income and, to some extent, assets. These would just need to be modified to better report wealth. Of course this means that everyone’s assets and liabilities needs to be reported, if only so the rest of us can “prove” that we don’t have enough net assets to be subject to the tax. For real estate, by the way, they assume that local assessor records would be an adequate source. They don’t address the problem of offshore secret trusts. They indicate no interest in counting “intellectual property”
Many years ago, an anonymous former IRS agent wrote a book advocating a “Doomsday Machine,” which would record every financial transaction by anyone in the US (and presumably by Americans abroad, I don’t recall.) He thought this was the only way that the income tax, as it existed then, could be enforced. Of course, since that time, this kind of surveillance has been facilitated by the digitization of much of the economy. It the book were updated, he’d now have to expand his machine to include all kinds of assets and liabilities.
Just in case anybody read this far and missed the point: A tax on the value of land, other natural resources, and government-protected privileges would avoid nearly all of the above problems, while still falling mainly on the wealthy.
update February 26 2019– NPR reports more poor results from wealth taxes, tho they don’t completely write them off.