The tax system is working as intended. So if we want to tax the rich, here are some alternative options.

The tax system is working as intended. So if we want to tax the rich, here are some alternative options.

Washington Post

Opinion by 

Catherine Rampell

Columnist

June 11, 2021 at 6:59 a.m. GMT+9. 

ProPublica’s bombshell report on leaked tax returns of the ultrawealthy has made people mad. They seem mad mostly at the rich, who paid little in income taxes as a share of just their income and virtually nothing as a share of their net worth. In some cases, actually nothing. Some billionaires — reportedly including the owner of this newspaper! — paid zero dollars in income taxes during a handful of years.

All as their fortunes swelled.

Fume all you want, but the tax system is working exactly how it was designed to. We’ve chosen not to tax “unrealized gains” as income — that is, we tax the increases on most assets only when and if those assets get sold.

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And sometimes, not even then, if those stock holdings or gold bars or whatever get passed along to heirs first.

As a society, we could make different choices. There’s a long menu of options to wring more money out of the very rich, including some good proposals from President Biden.

The Treasury Department asked law enforcement authorities to investigate the disclosure of tax records cited in a media report on June 8. (Reuters)

Let’s start with options that are popular but somewhat problematic. Many on the left love wealth taxes, such as those promoted by Sen. Elizabeth Warren (D-Mass). She has proposed taking 2 percent annually of fortunes greater than $50 million (3 percent for wealth above $1 billion). While the idea polls extremely well, its constitutionality is questionable. The Supreme Court has struck down wealth taxes before; given the court’s composition today, a different result seems unlikely.

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There’s also the thorny problem of assessing the value of very rich people’s assets every year. That’s easy for publicly traded securities (such as Tesla stock), but for more illiquid assets (a closely held business, art collection, intellectual-property rights to Taylor Swift’s song catalogue), valuation can be easily manipulated if no recent transaction has taken place.

Implementing an annual wealth tax is therefore likely to be an enormous boondoggle for professional appraisers, and to leave the Internal Revenue Service vastly outgunned.

Similar administrative headaches would occur if we annually “mark to market” the value of assets, another frequently proposed idea. This involves taxing not people’s wealth, per se, but taxing their capital gains according to how much their assets grew (or shrank) each year, even if those assets never got sold.

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In addition to appraisal challenges, this policy would likely present political problems. New research suggests that Americans really don’t like the idea of taxing capital gains before a sale, viewing it as unfair. And what happens when rich people’s assets decline in value? If there’s a giant recession, and Facebook stock tanks, does Uncle Sam cut Mark Zuckerberg a check?

So let’s talk about some more promising ideas.

One, which Biden has endorsed, is raising the corporate income tax rate. If corporate income taxes are primarily paid by shareholders — as economists generally believe — that means raising corporate rates would effectively increase the tax burden on the Warren Buffetts of the world.

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We could also impose a national consumption tax. Right now, billionaires can fund lavish lifestyles by borrowing at low interest rates against their stock holdings and use this untaxed money to fund things such as mansions or yachts. A consumption tax would hit such purchases.

Consumption taxes tend to be regressive, though, so other policy changes would be required to prevent hurting the poor.

Then there’s Biden’s proposal to raise the top tax rate on capital gains, and more important, to change when such taxes get triggered.

Right now, rich people can bequeath enormous estates to their heirs tax-free (up to a certain amount), and any gains their stocks or other assets have accrued over their lifetimes get wiped out at death as though they’d never happened, at least for tax purposes. Under Biden’s plan, however, the tax code would treat gains above a certain threshold as “realized” whenever the owner dies or otherwise transfers the asset to someone else. When either event happens, capital gains taxes would be due.

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Biden’s scheme would leave in place current incentives to hold on to assets as long as possible, which creates some distortions. But this “deferral benefit” could be addressed by basically charging interest for all the years a person held on to stock before dying, or either selling or gifting it. This idea, sometimes called a retrospective capital tax, was proposed some 80 years ago by Nobel laureate William Vickrey and has been developed further since.

These kinds of changes would go a long way toward making sure those who live off their wealth pay their “fair share," just as regular wage-earners do. They wouldn’t guarantee that every billionaire’s fortune gets taxed, particularly if we’re unwilling to eliminate tax benefits for charitable giving. There are other ways for the well-heeled to legally duck the Tax Man, too. That’s why adding a few different policy changes would be helpful, if the goal is to get the richest Americans to pony up.

“The tax code is sort of a Swiss cheese approach,” says University of Chicago tax law professor Daniel Hemel. “So, let’s add some more layers of cheese.”

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