The first thing to be said about Senator Elizabeth Warren’s plan for a wealth tax — she’s promising to release the particulars soon — is that it attacks one of the pillars of American greatness. It is hard to imagine anything more un-American than an attack on wealth. Accumulation of wealth is central to our right to life, liberty, and the pursuit of happiness. It is the fruit of that uniquely American personality trait — optimism.
That can-do spirit has beaten the odds countless times, including all the Horatio Alger stories that populate American history. The impact of American wealth is not limited to the obvious manifestations of leading businesses and standards of living. It includes the universities, foundations, and private health, conservation, and other charitable organizations, which are the ultimate beneficiaries of much of our commercial wealth and are the envy of the world.
Yet attacking wealth is precisely what that the senior senator from Massachusetts proposes to do. Though she’s yet to issue the details, Mrs. Warren is now advertising on her Web site what she’s calling the “Ultra-Millionaire Tax.” It proclaims that a “small tax on the great fortunes of more than $50 million can bring in nearly $4 trillion to rebuild America’s middle class.” It adds: “It’s time for the rich to pay their fair share.”
Interesting: IRS data show that the top one percent already pay circa 40% of all income taxes. Yet Senator Warren’s promises ignore one of the laws of economics — that if you tax something you get less of it. So one must calculate that Senator Warren wants not simply to transfer wealth. One has to figure that she wants less wealth in toto. She seems indifferent to, or unaware of, the prospect that her tax would undoubtedly produce that result.
So what’s wrong with a wealth tax? First, it is an act of confiscation. That is not only un-American, it is forbidden by the Constitution. It took a constitutional amendment to tax incomes. Any proposal to tax wealth itself, never mind the wealth of only certain Americans, would face a constitutional challenge. Calvin Coolidge, who ignited one of the great booms in American history, called over-taxation legalized larceny.
Second, a wealth tax would raise the cost of capital. Simple financial arithmetic proves that lowers economic activity. That’s because fewer investments will be able to meet their threshold after-tax returns. It is akin to the capital gains tax in terms of its negative effect on economic activity — except that you pay it every year. You do so whether or not you have sold the asset and whether or not you have a gain.
At the margin, a wealth tax would encourage more selling — meaning lower asset prices — to create liquidity with which to pay the tax. Mrs. Warren’s basic threat is a 2% annual tax on household net worth between $50 million and $1 billion. While 2% might sound low, it adds up over a decade to 20% of the value of the asset in question.
The effect on personal income, though, would be even greater than the 2% would suggest. A typical return today on a relatively low-risk asset, say an investment grade corporate bond, would be a yield of circa 5%. Thus a 2% wealth tax would be the equivalent of a 40% income tax, higher if the yield is lower, and vice versa. And you would still have to deal with regular income taxes of circa 40%. Adding in state and local taxes, the wealth owner would have to invade capital to survive.
Finally, there is the unimaginable complexity. A wealth tax will be a godsend to appraisers. For the tax would logically have to include assets, like real estate and art, for which there is no readily available daily published market price supported by actual transactions. If the wealth tax were to exclude real estate and art, the American stock markets would drain away into apartment buildings and Picassos.
The potential for endless arguments between taxpayer and the IRS over appraisal value would consume immense amounts of time (and money) in a totally unproductive activity. One could preview these kinds of discussions today in the death tax settlement of any large, moderately complex estate. Such estates take years to settle, typically three years or more.
A wealth tax every tax year could take as much time to resolve as is required to settle a large estate. Tax courts might not end in total gridlock, but they would have to be expanded radically.
Wealth taxes have always appealed to the psychopathically envious. When wealth taxes have been tried — in, say, Europe — they have often been scrapped after failing to producing expected revenue and driving productive citizens to more tax friendly climes. The Wall Street Journal reports that some 70,000 millionaires fled France before its 1.5% wealth tax was rescinded.
A reprise of the Revocation of the Edict of Nantes? That end of religious freedom was a catastrophe for France, costing it close to half its Huguenots, some of its most productive citizens. Could something like that happen in America in reaction to this attack on economic opportunity? Winston Churchill once said that “America always does the right thing ... after trying everything else first.” But do we really have to try a wealth tax?
Mr. Childs is a private investor based in Florida.