I’ve been following with great interest Democrat Senator and presidential candidate Elizabeth Warren’s proposal for a wealth tax. In a March 15, 2019 opinion entitled “Elizabeth Warren Actually Wants to Fix Capitalism,” New York Times columnist David Leonhardt writes that Senator Warren believes an annual wealth tax on net worth exceeding $50 million would generate more than $250 billion annually, paying for social programs she believes are vital to our continued prosperity.

Warren and some economists point out that our present system taxes our income but not our balance sheet, which would be more progressive. Many working-class Americans are taxed on all earned income, while wealthy individuals pay lower capital gains tax rates, avoid income taxation altogether on certain investments (such as state and municipal bonds), and largely avoid, or at least minimize, the federal estate tax, especially with the current exemption levels exceeding $11 million.

When wealthy individuals make large lifetime gifts or bequests at death, the gift, estate and generation skipping transfer taxes (otherwise known as “transfer taxes”) are imposed. This is a balance sheet determination of the fair market value of amounts transferred to a loved one.

Western governments imposed and collected transfer taxes as early as the 17th century, usually to pay for wartime expenditures.  They became a staple of the American tax system under Presidents Theodore Roosevelt and Woodrow Wilson in the early 20th century as a revenue enhancement as well as a means to address social inequality, and not allow for great concentrations of wealth to be held in the hands of a “ruling class”.

In England, Winston Churchill argued that estate taxes are “a certain corrective against the development of a race of idle rich”. This issue has been referred to as the “Carnegie effect,” for Andrew Carnegie. Carnegie once commented, “The parent who leaves his son enormous wealth generally deadens the talents and energies of the son, and tempts him to lead a less useful and less worthy life than he otherwise would”.

Warren extends this philosophy to an annual balance sheet tax. Most of us pay, directly or indirectly, property taxes, which are also a balance sheet tax based on the value of one line-item, real estate. So working class families pay an income tax and a partial balance sheet tax. Essentially income and the major asset that many working class families own is taxed. Warren wants to broaden the balance sheet tax for wealthy individuals to encompass their entire net worth.

As Senator Warren proposes, an annual wealth tax would break up concentrations of individual wealth while providing a means to correct “economic fairness,” which itself is a nebulous phrase.

As anyone who has ever filed a Federal Gift Tax Return Form 709 or a Federal Estate Tax Return Form 706 knows, determining a date certain, fair market value of one’s balance sheet is a largely subjective exercise, especially when one owns commercial and rental real estate and/or closely held business interests.

As opposed to publicly traded stocks, whose value is easily determined at any given moment, determining the “fair market value” for difficult-to-value assets can take many months and cost many thousands of dollars. First, the taxpayer hires an appraiser to determine the value of land, building and other hard assets. Next, a business valuation specialist must then address the value of the shares, partnership or membership interests of the company or partnership that owns the hard assets.

The share/partnership interests are usually discounted because closely held business interests can’t be easily liquidated (as opposed to shares of publicly traded shares of stock), transfers are restricted by agreement among the shareholders and partners, and other factors, such as minority interests that can’t control the direction of the company or partnership.

What about foreign assets owned by a wealthy person? Presumably those would be included in the computation, otherwise the wealth tax could be easily avoided by establishing foreign entities to own domestic stocks, bonds and real estate.

Intellectual property also poses difficult valuation obstacles. How long can one expect the income stream to last? What will future sales look like? Will the underlying service or product be usurped by new and better products, services or technologies?  This not to mention how complicated irrevocable trusts and other ownership devices play into whether an asset is even part of the balance sheet of any particular taxpayer.

Determining these values for a one-time gift or as a date of death value is difficult enough. I can’t imagine the regulatory, compliance and enforcement costs associated with an ongoing, annual wealth tax.

The debate is just now starting and will presumably last through the 2020 presidential election. I wonder whether this wealth tax that many candidates are sure to endorse is intended merely as a campaign pledge to gain votes or are truly something intended for a legislative agenda. One selling point is obvious. “There aren’t many individuals that will be subject to the tax because the floor is so high.” That was the original, persuasive argument for the imposition of an estate tax. You may recall that in the early 1970s the federal estate tax exemptions fell to the point where many regular working-class individuals were affected, as those whose estates above $250,000 became subjected to the tax.

I suggest that any wealth tax act should be labeled “The Trust Attorney’s Full Employment Act”. It certainly will be interesting to follow.

© 2019 Craig R. Hersch. Originally published in the Sanibel Island Sun.