Thoughts About Wealth Taxes

Recent proposals by some of the Democratic Party candidates , namely, Senators Elizabeth Warren and Bernie Sanders, during the past debate season brought up the idea of a wealth tax. Though neither Sen Warren (D-Mass.) nor Sen. Sanders (I- Vt) will be the Presidential nominee of their party, their idea of a wealth tax has gained new currency among various segments of the voting population. The additional financial burden of the covid-19 virus, has resulted in major deficits in state and federal budgets due to the shutdown of the American economy and the subsequent loss of tax revenue. Government entities, federal, state and local are now scrambling for ways to raise revenue to make up for deficits in amounts never seen before. The Federal government recently appropriated multi-trillions (you read it correctly trillions, not billions) of dollars in various emergency aid programs creating a new record federal deficit. Additionally, the Federal Reserve, through its Open Market Committee has lowered interest rates to near zero and for the first time in American history talk of negative interest rates is being heard. What we can say with certainty is that tax rates will rise as the current and projected deficits are not sustainable without the breakout of severe inflation which would lead to higher interest rates as well.

Various economists concerned with “income inequality” have proposed a “wealth tax”, namely a percentage of one’s wealth above a certain amount. Sen Warren in particular had campaigned on this issue, touting how modest this tax would be: only 2 cents. She proposed a tax of two percent on wealth above fifty million dollars. So, as she described it, a person with a net worth of Fifty million and one dollar would simply pay a mere two cents. That sounds quite reasonable and who would oppose such a modest measure? If, as Sen Warren states that this tax is a minuscule two cents, one could respond by asking why is such a tax worthwhile? Two cents would hardly dent the Federal budget deficit. The answer is that our dear office seekers promise one thing and deliver another.

Let’s look at another tax and see how it worked out in reality. In 1969, the Alternative Minimum Tax (AMT) was introduced as Treasury Secretary Joseph Barr told Congress that 155 high income individuals didn’t pay any income tax as they made use of various provisions in the tax code that enabled them to reduce their tax liability to zero. The AMT disallowed certain deductions at various income levels and a new tax had to be calculated thus ensuring that all taxpayers would pay something. So far so good. But that’s not what really happened. This tax ended up affecting millions of middle income taxpayers who lived in high tax states such as New York, Connecticut, and New Jersey. The loss of deductibility of the state income tax on Schedule A resulted in an AMT recalculation costing these taxpayers thousands of extra dollars per year in taxes.

All revenue legislation must originate in the House of Representatives, as per the U.S. Constitution. Of course, if it passes the House, it must go to the Senate, where the Senate Finance Committee will put its two cents in as well. Differences between the House and Senate bills then must go to a conference committee which will produce a joint bill which will go to the President for signature. During this lengthy process, lobbyists will be hard at work looking to represent their clients and seeing to it that the “pure” intentions of tax reform don’t affect their employers. So little if any tax legislation looks as it was supposed to look and it is unpredictable what kind of bill emerges.

AMT was supposed to affect 155 individuals and it affects million. The government, in its rabid quest for revenue will similarly expand the so called wealth tax to affect millions as well, despite its supporters denials How do you determine anyone’s wealth? Is it money in the bank? Stocks in a brokerage account? Art hanging on the walls? Rings on your fingers? The value of your mortgaged house? It goes on forever as friendly “revenuers” will be visiting to determine the value of the chair you are sitting on.

Computers and the information age have made a new type of tyranny available, and that is what this proposed wealth tax would be. The American people have a dream and it would be dream killing. In 1972, George McGovern running for President learned this lesson in Lordstown, Ohio where he addresses a United Auto Workers local on strike at the time against GM Assembly, the toughest management group of General Motors Corp. At that time, McGovern promised that if elected he would tax all estates over $500,000 at one hundred percent, thus producing social and asset equality in America. To his surprise, the union members booed him. He turned to his colleagues on the podium and asked “What’s wrong with these people, do they think they’re going to win a lottery?” No , they didn’t think they were going to win a lottery, they just had the American dream, and the dream still lives. Sen McGovern lost in one of the greatest landslides in American history. The voters made it clear, no to any wealth tax, no to dream killing.

Judge Learned Hand, in the case of Gregory v. Helvering ( 1934) wrote “anyone may arrange his affairs so that his taxes may be as low as possible; he is not bound to choose that pattern that best pays the treasury. There is not even a patriotic duty to increase one’s taxes….nobody owes any public duty to pay more than the law demands”. Senators Warren, Sanders and others who would kill the American dream would be well advised to consider Judge Hand’s words and decision, which remains true to this day.

Garry S. Sklar Las Vegas, NV May 3, 2020