Senator Sanders and Senator Warren have made wealth tax proposals that would tax Americans with “wealth” in excess of $32 million and $50 million respectively. Both proposed wealth taxes have increasing rates of tax with Senator Sanders plan proposing a top of rate of 8% on taxpayers with “wealth” in excess of $10 billion and Senator Warren proposing a top rate of 3% on taxpayers with “wealth” in excess of $1 billion. Ignoring the overall issue of constitutionality (the wealth tax proposals are probably not allowed under the Constitution), there are a plethora of very serious negative issues with their proposals that have not yet received any attention.
Senator Sander’s and Senator Warren’s wealth tax proposals, in great part, would essentially cost philanthropic taxpayers nothing, but would reduce charitable contributions dollar for dollar equal to the taxes collected.
Senator Sanders’s and Senator Warren’s proposals do not tax net worth. As a result. the targeted individuals, after selling assets to pay the wealth tax, would have significantly differing reductions to their net worth.
Senator Sanders’s and Senator Warren’s proposals purport to collect trillions of tax dollars during the first decade from the wealth of Americans’ investments in American companies while choosing not to extract a single dollar of wealthy foreigners’ investments in American companies.
Why would charities be the ultimate payors of the wealth tax? It has been widely reported that Warren Buffett plans to leave each of his three children $2 billion and the rest of his estate will be given to charity. Mr. Buffett’s estate plan must therefore set aside the first $10 billion of his $88 billion of “wealth” for his children and applicable federal estate taxes. The remainder goes to charity. To the extent that Mr. Buffett pays wealth taxes before death, every dollar of wealth tax will reduce his estate dollar for dollar therefore reducing his ultimate charitable donations dollar for dollar. The government will be effectively receiving every dollar of its wealth tax from charitable organizations with Mr. Buffett being no more than an intermediary. Bill Gates, Michael Bloomberg, Pierre Omidyar, and Mark Zuckerberg and many other billionaires have made the same or near equivalent charitable commitments as Mr. Buffett. For the many philanthropists with great wealth, the wealth tax plans essentially robs charity to increase tax revenues. This result is nothing less than startling.
Returning both to Senator Sanders’s 8% top rate and using his definition of “wealth”, there would only be 47 taxpayers paying the 8% rate. Under a generally accepted accounting principles definition of net worth, only about 34 taxpayers. And today, 11 of the 34 taxpayers are 80 years old or older? Of those 11, 8 are rated by Forbes as philanthropic and therefore it is probable that their wills provide at least half of their net worth to charity. In each situation, the proposed wealth tax would reduce their estates and therefore their charitable donations dollar for dollar.
Senator Sanders’s and Senator Warren’s proposals do not tax net worth. Taxpayers do not have billions of dollars in cash to pay additional taxes. Therefore, they would be forced to sell assets to pay their wealth tax. The proposed wealth tax calculations of wealth do not account for these federal and state income tax liabilities that would occur as the result of their selling assets to pay the wealth tax. This is required by generally accepted accounting principles in calculating net worth because the taxpayer cannot sell assets without paying income taxes. While tax rates would obviously vary between taxpayers in different states with differing tax basis in their assets, all impacted taxpayers would need to pay federal and state income taxes on the assets sold to pay the wealth tax. With 35% state and federal taxes on the sale of an asset, the ultimate cost of the wealth tax would increase by about one-third.
The result of not accounting for required income taxes in the calculation of net worth is both higher taxes than advertised plus differing ultimate tax rates based on the tax basis of the assets of the taxpayer. Beyond the scope of this short piece, many wealthy real estate investors own property that if sold would not generate sufficient net cash proceeds after repaying outstanding mortgages to pay resultant current state and federal income taxes. The result is that under the wealth tax proposals, assets which have zero value after paying off existing mortgages and resulting income tax liabilities if sold today would be subject to the wealth tax.
One must ask why we would consider taxing American wealth invested in American companies and not tax foreign wealth invested in American companies. The Waltons are invested in Walmart, a primarily U.S. company. Foreign investment in the United States is over $4 trillion. Under the plans of Senator Sanders and Senator Warren, the wealth tax taxes the Waltons, but excludes all foreign investment. How does this make any national sense?
The proposed wealth taxes by Senators Sanders and Warren have not been subject to either robust debate or scrutiny by the Congressional Budget office. Ignoring the obvious constitutionality issues, the undiscussed impacts to charity, the economy and basic fairness of the proposals are the elephant or perhaps the herd of elephants in the room. One quickly gets to H.L. Mencken who in 1920 said “There is always a well-known solution to every human problem – neat, plausible and wrong.”
Professor Adler and Madison Spach, Esq are publishing a two-part analysis of the wealth tax proposals in Tax Notes November 4 and 11. The issues above are only the tip of the iceberg with respect to serious issues with the proposed wealth tax.