I’ll confess; I don’t understand single-issue voters. Don’t get me wrong, I appreciate how important the right to choose or the 2nd Amendment or a crocodile-infested moat along the southern border may be to some people, but I’d like to think that before anyone steps into a balloting box, they’d have selected a candidate based on the strength of their full platform.
That being said, if Elizabeth Warren earns the Democratic nomination, she could build the majority of her campaign around a promise to blow up the moon, and I’d still be the first in line to give her my vote. Why? A single issue: I’m dying to know whether her headlining tax proposal — the unconventional “wealth tax” that she claims would generate $2.75 trillion dollars over ten years from the richest 75,000 families in America — would violate the U.S. Constitution.
Figuring it out would be fascinating. The Supreme Court would have to get inside the minds of the framers of our constitution, answer a question – what is a “direct tax? — that vexed even those who coined the phrase, take a break to allow Kavanaugh to bound a couple of cold ones, and then ultimately, determine whether to side with a case from 1794 or 1894. Preeminent legal scholars on both sides of the political aisle will form carefully crafted opinions, only to be reduced to screaming at one another on a CNN split-screen. The country’s have’s will cry “Socialism!” while the have not’s will retort, “Pay your fair share!,” driving an even deeper rift between the two groups. Things, it’s safe to say, will get crazy.
But perhaps I’m getting ahead of myself. First, let’s understand what Warren’s wealth tax is all about. It would work like so: each and every year, the wealthiest Americans would have to value all of their holdings — their publicly traded stock, private businesses, personal residences, you name it. If the net value is in excess of $50 million, the owner of all that wealth will pay 2% of every dollar of excess; hence the “TWO CENTS” chants that have become so popular at Warren rallies. If the net value exceeds $1 billion, the rate increases to 3% of every dollar in excess of that thresholds. The idea, as we discussed in our last segment on Bernie Sanders, is the thread that binds all of the prominent Democratic candidates: to raise additional tax revenue necessary to implement promised social programs, but to do so from the rich, and only the rich. Warren argues that her wealth tax would do just that, to the tune of the aforementioned $2.75 trillion over the next ten years. Seems simple enough, right?
There are more than a few problems with instituting a wealth tax, and while concerns like avoidance rates and valuation challenges certainly deserve attention, those discussions seem premature when the entire tax may violate Article 1, Section 9, Clause 4 of the U.S. Constitution. So let’s turn our attention back to that matter.
Why would a wealth tax be met immediately with a legal challenge that would be fast-tracked to the Supreme Court? To understand the answer, we’ll have to travel back in time to a country in its infancy, desperate to limit the federal government’s powers while at the same time, granting Congress the ability to tax northern and southern states with, how should I put this…certain philosophical differences. In response to those challenges, two simple words — direct tax — were added to Article 1; two words of great import that, it would appear, none of the Constitution’s framers had bothered to define.
In the 200 years that have followed, far more has been done to further muddy the definition of a direct tax than resolve it, making Warren’s wealth proposal ripe for legal challenge. To figure out how we got to this point, let’s undertake a brief review of the evolution of the tax rules in this country, with little to no concern for historical accuracy. At times like this, I REALLY appreciate that Forbes got rid of its comment section. Here we go…
Constitutional Convention and the “Direct Tax”
In the spring and summer of 1787, men who now grace our currency set about establishing a new government for a fledgling country at the Constitutional Convention. Included in the original draft of the Constitution was Article 1, Section 8, Clause 4, which gave Congress the power to impose the “taxes, duties, imposts and excises” necessary to pay the country’s debts and provide for its common defense and welfare. The only catch, however, was that all “duties, imposts, and excises” were required to be uniform. In other words, Congress couldn’t impose a duty at one rate in Connecticut and another rate in Maryland; the rates had to be the same.
Initially, the hope was that duties, imports, and excises would be the extent of the federal government’s taxing power, with any additional responsibility falling to the separate states. The framers of the Constitution did recognize, however, that at some point — for example, a time of war — additional revenue might be necessary, which explains why Clause 4 provided the right to Congress to impose “taxes” in addition to duties, imports and excises. No income tax was imposed at that time, however, nor would it be — barring a few temporary exceptions –for the next one hundred years. Nevertheless, Clause 4 gave Congress the power to tax whatever it needed to — from income to people to land — and that made some in the south a bit nervous.
The southern states feared that the government might use its taxing power to kill two birds with one stone, collecting revenue by taxing behavior it didn’t approve of; for example, slavery. The south was concerned that Congress could levy a tax on slave ownership, under which the southern states would bear a disproportionate share of the burden when compared to their counterparts in the north.
As a result, southern leaders pushed for a requirement that any “direct tax” on people or property must be allocated among the states based on population. This meant that if the government wanted to tax, say, $10 per slave — with slaves being considered property at that time — rather than collecting the tax directly from slave owners, Congress would be required to multiply $10 by the number of slaves, compute the total revenue to be generated, and then allocate that revenue among the states based not on slave ownership, but on population. Thus, if Connecticut and Georgia had an equal number of people, they would pay the same amount of tax, even though Georgia might have far more slaves.
A similar process would play out on a tax on land, either by acreage or value. With respect to a per-acre tax, the south was concerned that in the absence of apportionment, it would place a heavy burden on those states, where there were large swaths of land that weren’t heavily populated, resulting in southern land owners paying a much higher per-acre burden than those in the north, where there was less land and more people to share the tax burden. Requiring such a tax to be allocated based on population, rather than acreage, would shift more of the tax to the north. In terms of a tax on land value, while it might not seem intuitive that such a tax would be fairly represented by population and lend itself to apportionment, the framers of the Constitution believed it would, the idea being that more people would move to cities or fertile lands, and thus population and “value” would align. That is not true of modern America, of course, a point that may become prominent in any future challenges to a wealth tax.
Acquiescing to the south, the apportionment requirement was added to the Constitution as Article 1, Section 9, Clause 4, which states:
No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.
This allocation requirement created another conundrum, however. If direct taxes were going to be allocated among the states based on population, how should slaves be counted towards the population? The north, as you can imagine, wanted each slave to count as a person for these purposes, resulting in a larger allocation of tax to the south. The south, on the other hand, argued that if slaves should count as a person for population purposes, they should also count as people for purposes of political representation. This gave rise to the famous “Three-Fifths Compromise,” which was most recently brought to the public’s attention by noted Constitutional Law expert Frank Reynolds in Season 14 of It’s Always Sunny in Philadelphia. In this compromise, Article 1, Section 2, Clause 3 of the Constitution provided that for two purposes — allocation of direct taxes and determining political representation — each slave would count as three-fifths of a person.
To summarize, any “direct tax” on people or property had to be allocated among the states based on population, with slaves counting as 3/5 of a person. As a result, the term “direct tax” became rather important. Unfortunately, history would reveal that the framers of our constitution were not unlike board members of a modern corporation, spouting meaningless buzzwords that may sound important but that no one, the speaker included, actually understands. A “direct tax,” it would appear, was just such a buzzword.
How do we know? Because James Madison was keeping copious notes during the Constitutional Convention, that’s how, and he noted that when Rufus King asked for the precise definition of a direct tax, Madison’s recorded in his shorthand, “no one answd.” Soon after, Alexander Hamilton would lament that it was “a matter of regret that terms so uncertain and vague in so important a point were to be found in the Constitution.”
Nonetheless, the concept of a direct tax made it into the Constitution, and the only items that clearly fell within its definition were a per-person poll tax and a tax on land acreage or value. Beyond that, it would be up to the courts to determine what was and wasn’t a direct tax, and we wouldn’t have to wait long to get our first look.
Hylton v. United States
In 1794, Congress assessed a tax on carriage owners. Daniel Hylton, who owned a veritable armada of 125 carriages, was none too pleased with the new tax. He sued the government, arguing that the tax was a “direct tax” on property — carriages being no different than land — and because it wasn’t being allocated among the states based on population, was unconstitutional.
The court, which at that point was manned by many of the same people who had drafted the constitution, concluded that the carriage tax was not a direct tax. In doing so, it viewed the tax in a roundabout way, suggesting that:
- We don’t really know what a direct tax is.
- We do, however, know that a direct tax is required to be allocated among the states based on population.
- It would follow, then, that only those taxes that can reasonably and equitably allocated among the states based on population can conceivably be a direct tax.
Applying this logic to the carriage tax, the Supreme Court noted that in some states, there are many carriages, but in others there are few. How could this tax be equitably allocated among the states based on population? Suppose the tax was to be $10 per chariot, the total population of the U.S. was 100, and the total tax to be collected was $1,000. Virginia, where there are 50 carriages, has a population of 20, and thus is allocated $200 of the tax. Because there are 50 carriages in Virginia, the tax comes to only $4 per head. Meanwhile, Connecticut, with a population of 8, would be allocated $80 in tax. Unfortunately, there are only two carriages in all of Connecticut, and so each owner pays $40 in tax, ten times more than a carriage owner in Virgina. Sound fair?
Not to the Supreme Court, as it called such an allocation “too manifestly absurd to be supported.” As a result, a carriage tax could not be a direct tax, because it could not equitably be allocated among the states based on population.Thus, the court stated, the “only objects that the framers of the Constitution contemplated as falling within the rule of apportionment were a capitation tax and a tax on land.” Thus, at least in the moment, Hylton established the precedent that a tax on luxury property, to be borne only by those who could afford such luxury, was not a direct tax required to be apportioned among the states.
Over the next century, the courts would repeatedly side with the decision in Hylton, refusing to define a tax as a “direct tax” even once. Applying the Hylton logic that only a tax that could equitably be allocated among the states could possibly be a direct tax, the Supreme Court approved the constitutionality of taxes on financial transactions, the initial version of the estate tax, and even one of the first — albeit temporary — impositions of an income tax during the Civil War.
The Income Tax Act of 1894 and Pollock v. Farmers’ Loan & Trust Co.
In 1894, a confluence of factors led Congress to enact it’s first peacetime national income tax. The idea was to extract the revenue from the wealthy by providing an exemption of $4,000 — over $100,000 in today’s dollars — with any excess taxed at 2%. The tax applied to all forms of income, from compensation to services to rents to investment income.
The tax was quickly challenged as unconstitutional, with opponents alleging that a tax on income arising from land (think, rents) and personal property (think, stocks and bonds) was akin to a tax on the land and personal property itself, and because a tax on property was a “direct tax,” so was the new income tax. The Supreme Court, in one of the more contentious decisions in its history, agreed by a 5-4 vote, striking down the income tax as unconstitutional because:
- Part of the tax was a direct tax on the income generated by land and even personal property, and
- Because that income could not be cleanly separated from taxes on income from services — which were not direct taxes — the entire law had to be struck down.
In reaching its decision, the court largely ignored the principle established in Hylton — to say nothing of the century of supporting case law that followed — that only those taxes that could be reasonably allocated among the states can possible be a direct tax. Had they embraced that line of thinking, clearly, an income tax would not have passed muster.
To illustrate, compare Connecticut with Alabama. If an income tax were required to be allocated in accordance with population, Alabama, having the larger population, would pay more of the burden than Connecticut, despite the fact that the per-capita income in Connecticut is nearly twice as large as in Alabama. This point was made in passionate, angry fashion by the four dissenting opinions in Pollack; judges who appeared astounded that the Supreme Court would effectively foreclose the ability for the U.S. to ever implement a national income tax.
Strike down the income tax it did, however; at least for a short while. Because by the time 1909 rolled around, Congress realized that a national income tax was a necessity, and so it overruled Hylton via the 16th Amendment, which provided:
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
It’s important to note that the 16th Amendment did not establish that an income tax is not a direct tax; rather, it simply stated that an income tax — even if it WERE a direct tax — may be taxed directly to individuals and is not required to be allocated among the states based on population.
The 16th Amendment was ratified in 1913, the same year our present day income tax began to take shape. And over the century that has followed, there has been little need for the courts to address the question of what, exactly, is a direct tax. The Supreme Court did take on the issue recently, however, when deciding in NFIB v. Sebelius that the penalty for failing to carry health insurance imposed as part of Obamacare was not a direct tax required to be apportioned among the states. In that decision, the court again reiterated it’s prior thought process in Hylton that a direct tax was limited to poll and property taxes:
Even when the Direct Tax Clause was written it was unclear what else, other than a capitation (also known as a “head tax” or a “poll tax”), might be a direct tax.
Aside from Sebelius, it’s been a quiet century for the direct tax. But that may be about to change. Should Warren, or any other Democratic candidate, for that matter, attempt to impose a national wealth tax, the reaction will be swift. Battle lines will be drawn.
Opponents of the tax will say the constitution is clear — a wealth tax on the value of real or personal property is a direct tax, and must be allocated among the states based on population. Pollock will be cited.
Supports of the constitutionality of the tax, however, will stress that no one was in a better position to interpret the meaning of a “direct tax” than the framers who sat on the court in Hylton, and will thus embrace that decision’s principle that only a tax that can reasonably be allocated among the states can be a direct tax, and a tax on wealth cannot possibly fit that description. They will stress the dissenting opinions in Pollock, the century of case law prior to Pollock, and the fact that in today’s America, wealth and population do not go hand in hand.
Who will win? I could tell you what I think, but I also felt very confident that the Seahawks were going to cover against the Saints yesterday, so perhaps I’m not the best prognosticator going. Regardless of things turn out, however, the legal battle with be a sight to behold.
Ok…with that trip down memory lane complete, let’s look at the totality of Warren’s tax plan. The wealth tax has gotten all of the attention, but that is far from the only intriguing, novel, or controversial piece to her tax platform. Interestingly, however, for someone whose tagline is “I’ve got a plan for that,” there is still some work to be done on Warren’s tax proposal. Let’s get started…
Candidate: Elizabeth Warren
The is a timely review, because yesterday, for the first time, Warren topped a key poll of the Democratic field. A former Harvard bankruptcy law professor and current Senator from Massachusetts, this is Warren’s first foray into the race for President. As noted above, Warren has built her campaign around the promise to ignore the bluster and personal attacks that have come to define our political landscape, and opt instead to run on her plans. To wit, her website has a page dedicated to no fewer than forty formal proposals, ranging from gun control to foreign policy to affordable housing.
Her tax plan, however, is still coming into focus. While some areas have been addressed in detail –for example, her wealth and social security taxes — others are more vague, like her stated desire to generate $1 trillion in revenue by repealing as-yet-unspecified provisions of the Tax Cuts and Jobs Act.
As with all the Democratic candidates, Warren’s main talking points are her stated desire to tax the rich. She recently came under criticism from other Democratic candidates, however, for her appearance on The Late Show with Stephen Colbert, where she didn’t clearly answer when asked whether a tax increase on middle-class taxpayers would be necessary to pay for her Medicare-for-all plan. Thus, like Sanders, Warren may have to eventually concede that under parts of her plan that have yet to be announced, taxes will increase for most taxpayers, and like Sanders, she will have to implore voters to look at taxes as just a part of overall household outlays, and to understand that if taxes go up by less than health care payments decrease, you’ve done OK for yourself.
Below, we’ll take a look at what we know, and don’t know, about Warren’s tax plan and how it would compare to current law.
Top Rate On Ordinary Income
Current Law: As part of the TCJA, the top rate on ordinary income — things like wages, business income, and interest income — was reduced from a high of 39.6% to 37%. Of course, the U.S. tax system is a progressive system, meaning we pay higher rates as our income increases. Under the current structure, those rates begin at 10%, and then climb to 37% via the following steps: 12%, 22%, 24%, 32%, and 35%. It’s also important to note that there is an additional 3.8% surcharge that applies to the “net investment income” — things like interest income or income from a business in which you don’t actively participate (more on this later) — of taxpayers with adjusted gross income in excess of $200,000 (if single, $250,000 if married), meaning the top rate on these forms of income can reach a high of 40.8%.
Warren’s Plan: For someone so intent on taxing the rich, Warren has yet to formalize her position on the top ordinary tax rate; or any rate for that matter.
But here’s what we DO know: Warren would ratchet up the net investment income tax, tacking on an additional 14.8% rate — yes, on top of the existing 3.8% rate — on a taxpayer’s net investment income once income exceeds $250,000 for an individual or $400,000 for a married couple. Under this new regime, the tax on net investment income would be paid as follows (but note, the tax is always imposed on the lesser of the net investment income or the excess of adjusted gross income over the applicable threshold).
|AGI < $200,000
|between $200,000 and $250,000
|AGI < $250,000
|between $250,000 and $400,000
Of course, this in addition to any income tax; as a result, if Warren were to hold steady on a top ordinary rate of 37%, a taxpayer’s last dollars of interest income or passive business income would reach a high of 55.6% (37% + 3.8% +14.8%). Perhaps that’s why we don’t have a specific statement from Warren on the top ordinary rate; maybe it won’t change. After all, if a taxpayer makes $1 million from salary, Warren’s new Social Security tax (discussed below), will collect another 14.8% in payroll taxes on wages above $250,000 when compared to current law. And if that same $1 million were instead earned through investment income, as stated immediately above, that income would be taxed at 55.6%. And perhaps that’s enough for Warren.
Top Rate on Long-Term Capital Gains and Qualified Dividends
Current Law: Long-term capital gains (think: the sale of stock held more than one year) and qualified dividends are currently taxed at a high of 20%, though most American’s pay 15%, with those in the 10% and 12% brackets paying 0%. Of course, you have to tack on the aforementioned net investment income tax of 3.8%, so the rate reaches a high of 23.8%.
Warren’s Plan: Warren hasn’t stated whether she’d increase the top rate on capital gains and dividends, but again, perhaps that’s by design. Her new 14.8% net investment income tax would increase the top rate from 23.8% to 38.6%, which may satisfy Warren’s needs.
Current Law: If you earn money through wages or are self-employed, you pay payroll taxes. In the employer-employee context, the employer and employee split a 12.4% tax on earnings up to the Social Security wage base, which in 2019 is $132,900. For ALL wages, the employer and employee split a 2.9% Medicare tax. If you’re self-employed, you’re on the hook for the full 15.3% (though you do get to deduct half of the taxes on your return) unless, of course, you’re smart enough to form an S corporation and take advantage of a 60-year old opportunity in the law to avoid payroll taxes that we’ll discuss shortly. Finally, as part of Obamacare, those who earn more than $250,000 (if married, $200,000 if single), are subject to an additional 0.9% payroll tax.
Warren’ Plan: The wealth tax isn’t Warrens only “non-income” attack on the wealthy. In an effort to extend the solvency of the Social Security fund, she would dramatically revamp this aspect of the payroll tax system on the top 2% of taxpayer by instituting a new 14.8% payroll tax on earnings above $250,000, to be split evenly between employer and employee. Thus, a single taxpayer earning $500,000 of wages would presumably pay:
- 6.2% of Social Security tax on the first $132,900 of wages.
- 7.4% of Social Security tax on wages in excess of $250,000 under Warren’s new tax. (The employer would kick in another 7.4%).
- 1.45% of Medicare tax on ALL wages.
- 0.9% of Obamacare tax on excess earned income on wages above $200,000.
That’s a total payroll tax hit of $36,689, with $18,500 of it attributable to the new Social Security tax. If you’re self employed, you’re on the hook for (nearly) double that amount. As we discussed above under “ordinary income,” this may explain why Warren hasn’t yet promised to raise the top rate on ordinary income from 37%.
Current Law: Taxpayer are entitled to deduct the greater of 1) the standard deduction, or 2) the sum of the itemized deductions (things like mortgage interest, medical expenses, state and local income and property taxes, and charitable contributions). The TCJA nearly doubled the standard deduction (from $6,350 to $12,000 for single taxpayers, $12,700 to $24,000 for married couples), while limiting or eliminating certain itemized deductions, a confluence of changes that decreased the number of filers who will itemize from 30% in 2017 to 11% in 2018.
While certain itemized deductions are subject to limitation — for example, the deduction for state and local income and property taxes is capped at $10,000 — there is no longer any overall limitation on a taxpayer’s itemized deductions as there was prior to 2018.
There is none, from what I’ve seen. As mentioned previously, Warren has proposed repealing enough of the Tax Cuts and Jobs Act to raise another $1 trillion of revenue, but it’s not clear whether any of that revenue would come from curtailing itemized deductions. It’s much more likely that she intends to cut corporate deductions or repeal the new 20% deduction against pass-through income earned by sole proprietors, S corporation shareholders and partners in partnerships.
S Corporation Payroll Tax Opportunity
Current Law: First things first: it’s not a “loophole.” It’s just the law. It’s been this way for 60 years.
Back in 1959, the IRS stated that income earned by shareholders of an S corporation is not considered self employment tax for purposes of the 15.3% in payroll taxes we discussed above. As a result, if you operate a business, you have a choice:
First, you can operate a business directly, without an S corporation, and say you earn $2 million…all of the income will be subject to self-employment tax; the first $132,900 at 12.4%, and the full $2 million taxed at 2.9%.
Or…..you could set up an S corporation, have the $2 million paid to the corporation, and pay yourself a $100,000 salary. You’ll pay 15.3% on the $100,000 salary, but the remaining $1.9 million can be distributed to you without the imposition of payroll taxes. Not a bad deal.
Of course, the IRS can argue that your $100,000 salary was not high enough, and recharacterize some of your distributions to income and collect the payroll tax. But pay yourself “reasonable compensation” and the rest comes out without payroll taxes; not by virtue of a sneaky “loophole,” but rather a well-worn and widely-known subtlety of the law.
Warren’s Plan: Like Bernie Sanders, Warren would close the S corporation payroll-tax opportunity by imposing self-employment tax on all income allocated to a shareholder. And as discussed above, the self-employment tax burden will be increased significantly under Warren’s plan courtesy of the new 14.8% Social Security tax on income over $250,000. Truthfully, I’m guessing every Democratic candidate will loudly proclaim their allegiance to closing the S corporation “loophole,” and for one notable reason: party front-runner Joe Biden was discovered to have used the opportunity to his advantage on his recently-released 2017 and 2018 tax returns. To be clear, there was absolutely nothing wrong with what he did; but that won’t stop his competitors from delighting in the opportunity to point out that Biden took advantage of a “loophole” that, during his time as Vice President, his administration repeatedly attempted to close.
Current Law: When you die, if the value of your assets exceeds a threshold, an estate tax is due. The TCJA increased the exemption amount to $11.4 million ($22.8 million for a married couple), with any excess subject to a 40% rate. When your assets are passed through the estate to the beneficiary, the beneficiary takes the assets with a “stepped-up basis” equal to their fair market value. Thus, if they were to receive an appreciated building worth $10 million and sell it the next day for that price, no gain would arise.
Warrens’ Plan: There’s been nothing formal yet, and given Warren’s promise to institute an annual wealth tax on the value of a taxpayer’s assets, there may not be much of a need to ratchet up the rate on those same assets upon death. That being said, in the past, Warren has professed her desire to make death a “realization event,” meaning any appreciation in assets upon expiration would be taxed. On the plus side, valuation of those assets upon death shouldn’t be a problem, since under Warren’s wealth tax, those same assets would have been valued on an annual basis!
Current Law: The hallmark of the TCJA was the reduction in the corporate rate from 35% to 21%. That’s a 40% decrease, which definitely didn’t help the narrative that the bill was largely a giveaway to Big Business.
Warren’s Plan: As we’ve seen, Warren is full of new and unconventional ideas for raising tax revenue. And her corporate tax plan? It is certainly different, and sure to enrage tax policy experts. Warren has proposed taxing certain large corporations not on their taxable income, but rather their “book” income they report to shareholders. The reason is obvious: How many articles have you read in the past few years about Apple or Google or Wolf Cola reporting billions in profits but paying zero in income tax due to various special interest deductions and preferences? None. OK, fine, but other people have read a lot, and they’re not pleased about the whole thing. Warren knows this, so her plan — which will be popular among voters, if not tax nerds — will identify those corporations that report more than $100 million in “profits” on their financial statements, and require them to pay 7% for every dollar of financial statement profit above $100 million. I put profits in quotes because I assume it means bottom line net income after expenses, but I’ve been fooled before.
I’ve mentioned twice that policy experts won’t like this new plan. Why? It’s simple; we have corporate tax laws intended to tax corporate income. If you want to make sure big corporations pay tax, it probably makes sense to police that through the existing corporate income tax, rather than punt on the whole of subchapter C of the Internal Revenue Code and create a new tax imposed on book income, which is determined using a completely different set of rules.
It is very unlikely that Warren’s “real profits tax” would be the end of her changes to the corporate tax law. In April, Warren told Politico she intends to propose more corporate tax increases, stating, “our corporate tax code is so littered with loopholes that simply raising the regular corporate tax rate alone is not enough.”
What’s New and Different?
Go back and read the introduction. This wealth tax is a big deal. It would be destined for the Supreme Court. And aside from the constitutional issues, there are questions of valuation and administration. Each year, the wealthiest families will be required to assign a fair market value to all of their assets. That’s an easy task with regard to publicly traded stock, but what do you do about privately-held businesses? Rental properties? Personal assets? The value of these items is open to interpretation, and a heavy burden would be placed on these taxpayer not just in the form of the annual tax, but the cost of appraisals each and every year.
Then, of course, there is the question of the ability of the IRS to police a wealth tax. If Warren’s math is correct, 75,000 taxpayers will chip in to pay the tax, and because values can easily be manipulated, someone at the Service is going to have to take a close look at those returns. But the IRS is shrinking, and so substantive changes would need to be made to the Service’s staffing and valuation training before a wealth tax could be adequately enforced.
It’s hard to assign a price tag to the Warren plan, as it’s broken down into specific increases to pay for specific programs: $1 trillion in repeal of the TCJA to pay for climate change, $2.5 trillion from the wealth tax to pay for child care and higher education, another $1 trillion from new payroll taxes to help fund Social Security, and yet another $1 trillion from the real corporate profits tax to just blow on cute hats.
However you break it down, when you put it back together, it amounts to a significant tax increase over the next decade. More interesting than the cost, however, are the unique provisions highlighted throughout this discussion, signifying that should Warren win the White House, our nation’s tax laws could be in for a shake-up.