Columns, Opinions

Shanmugam ’23: Wealth taxes: politically flashy but problematic in practice

By
Staff Columnist
Monday, November 11, 2019

Had Elizabeth Warren proposed her wealth tax — a levy on net worth paid only by the wealthiest households in America — ten or twenty years ago, popular opinion probably would have branded her as an unapologetic socialist, consigning her proposal to a different day, a different debate and a different Democratic Party.

But that day has now come. In a primary where progressive candidates like Warren dominate the headlines, the Democratic party is making leftist causes increasingly central to its platform, bringing wealth inequality into the spotlight of national discourse. In a country where the top one percent of society controls 40 percent of its wealth, such crusades against inequality are not only politically prudent, but necessary to solving one of our country’s biggest problems.

Wealth inequality is extremely harmful to many sectors of American society. It impoverishes our schools, diminishes the political influence of average citizens relative to the wealthy, and leaves society more divided along partisan and cultural lines. Democratic leaders like Bernie Sanders and Warren are right to look for governmental solutions. Over the course of their primary campaigns, they’ve both unveiled plans to tax extreme wealth. Warren’s policy would impose a wealth tax of two percent on households with a net worth of over $50 million, with a one percent surtax for those with a net worth above $50 billion. Sanders’, on the other hand, proposes a one percent tax on households worth more than $32 million.

Noble intentions inside, Warren and Sanders are misguided in their proposals. These progressive candidates are setting themselves — and the government that they hope to lead — up for a litany of legal roadblocks and implementation issues. In their zeal for an infeasible wealth tax, progressives are overlooking more efficient and effective means of combating inequality  — perhaps because these alternatives would not be perceived to the same extent as an assault on the rich.

The biggest obstacle to a wealth tax is a constitutional one. As it is dreamed up by the Warren and Sanders campaigns, the levy would be collected annually as a percentage of a household’s net worth — the value of its assets minus the value of its liabilities. In legal terms, this sets up a debate with no clear answer: can a wealth tax be deemed a “direct tax?” Such a designation would call its very constitutionality into question, as Article I of the Constitution demands that federal direct taxes be “apportioned” — in other words, that they exact the same monetary toll from each state. But because net worth varies from family to family, a wealth tax as it is currently proposed would demand different amounts of money from each state, making its legality dubious.

In the worst case scenario, the wealth tax would be deemed unconstitutional and struck down in court. Precedent really isn’t straightforward here: in Hylton v. United States (1796), Pollock v. Farmers’ Loan & Trust Co. (1895) and Eisner v. Macomber (1920), direct taxes did find themselves on the losing end of the Supreme Court’s ruling — but generations later, sociopolitical context is too different to draw concrete conclusions.

In the best and most likely scenario, progressives would face a series of drawn out, expensive legal challenges from the right, pitting liberals’ financial backing against that of well-heeled conservatives, with no guarantee of success.  In an environment where election spending and advertising in new media are more important than ever ­— where political organizations have to make tough choices about how to spend limited resources ­— progressives cannot afford to fund a legal saga that could easily bear no fruit. The fight for a wealth tax is an uphill battle. Archaic institutional barriers make it a strategically poor way to address a pressing policy challenge.

It is not by chance that just one third of the countries that had wealth taxes in 1990 still do so today. Wealth taxes were common in Europe until policymakers realized that they were tasked with the impossible: assessing net worth. About 38 percent of rich families’ wealth is in assets that are valued in plain daylight by markets: stocks, bonds and other financial instruments. But the worth of what remains — art collections, yachts, private businesses — is tough to appraise and easy to manipulate.  The proposed duty would also create an obvious incentive to understate the value of each asset; the only point at which regulators would really be able to trust the price of an item would be at the time of its sale. The upshot? April 15th becomes a living hell for the taxman.

For more proof of how insurmountable the task is, consider that even already existing tax law is poorly enforced. In a country where politicians regularly make calls to “abolish the IRS,”  the agency would struggle to police and litigate foul play, such as appraisal manipulation and outright avoidance. Indeed, these administrative costs spelled the end for wealth taxes in European countries such as Austria and Denmark.

Of course, wealth inequality should not be left unchecked. Less problematic forms of taxation on the rich, such as estate and inheritance taxes, can serve to reduce it. Since in legal terms these levies are considered taxes on the “transfer of wealth” and not direct taxes, they sidestep statutory hurdles. Plus, they take advantage of the same “use it or lose it” principle on which the wealth tax relies, disincentivizing wealth hoarding over generations.  Similarly, the headline corporate income tax rate — cut 14 percent by the Tax Cuts and Jobs Act, which was the Republicans’ attempt at tax reform back in December of 2017 — has plenty of room to grow and would avoid the Constitutional quagmire of the wealth tax.

Progressives are at a crossroads in their quest to stem the uneven economic growth of the past few decades. Wealth taxes have more than enough of the political flash that the primaries demand; in this early stage of the presidential election cycle, candidates can gloss over the practicality of their proposals without much consequence. But if Democratic politicians truly want to remedy one of the most pervasive issues that America faces, they need to revise their strategy.

Arjun Shanmugam ’23 can be reached at arjun_shanmugam@brown.edu. Please send responses to this opinion to letters@browndailyherald.com and op-eds to opinions@browndailyherald.com.

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