Wealth Tax

 Wealth Tax

A wealth tax is founded on the market value of assets that an individual owns, and imposed on the wealth he or she possesses. A wealth tax is based on an individual’s net worth, that includes assets, minus liabilities. Back in 1999, Donald Trump proposed a wealth tax on the net worth of individuals and trusts that are valued at $10 million or more. He added that it would give rise to $5.7 trillion in new taxes, and by s doing, the money can be utilized in clearing the national debt.

An economist based in New York University, Daniel Altman, thinks a wealth tax will help the economy. He made a proposal suggesting wealth tax to replace income tax. He estimated that a flat wealth tax of about 1.5 percent would be befitting as a replacement of revenue from current income and estate taxes. An article written by Nigel Chwaya et al. (2019), most economists think that income inequality has been a significant problem in the United States. Most billionaires have an accelerated earning power, thus accumulating vast sums of money, which leaves the middle class ever more dependent on their jobs and credit cards. It’s easy to say that the wealthy class have worked hard and earned each dime they have, but also consider that the working class have also worked hard and never can get ahead because they are being taxed to high on such little income. How is a working-class family supposed to invest or have any assets if he can never truly “get ahead”?

Some argue that a wealth tax may scare away entrepreneurs. Then there are some wealthy that feel they should be taxed more. The chairman of Campus Works, Eric Schoenberg, a well-known millionaire from New Jersey, says that “the tax rate on investment income is lower than the tax rate on labor.” This implies that the work of a venture capitalist holds more value as compared to that of teacher, doctor, or police do.  I don’t feel like a wealth tax would stop people from investing if it would be certain that you would only be taxed once your endeavor is successful. Some ways to do this would be:

1. No tax for a household’s first $500,000.
2. 1% tax for the next $500,000.
3. 2% tax for wealth over 1 million.

Let’s be honest-if you are successful, and your assets are worth millions and millions of dollars, then why should you not be taxed on it? The low-income people are taxed just for working for minimum wage. Lower-income America cannot get ahead in the United States. If we were to replace the income tax with a wealth tax, the low income would come up, and the wealthy most likely would never really be affected. The United States could see some national debt relief.

Several other countries have successfully “taxed on wealth”.

• Argentina has raised its annual tax rate to 0.75% for 2019 on assets above ARS 800,00 (approx. US$48,000).
• Canada has applied a tax on private households worth above $3 million Canadian in addition to systematic property tax.
• France started a wealth tax in 2018 on real estate, but no financial assets.
• Netherlands tax rate progresses with wealth.

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2.2 Measuring Wealth Tax

            Wealth taxes are sometimes referred to as being better value for money than income taxes. A few contend that wealth taxes affect the choice between work and leisure less than income tax because they are not imposed exclusively on accrued capital, on productive activities. But others argued that because taxes on wealth are not charged on consumption, they can decrease savings tariffs. One counter-argument is that wealthy taxpayers can increase their savings rate to keep the desired rate of after-tax savings. Wealth taxes have a substantial influence on capital flight. In theory, any imposed tax on assets will encourage mobile capital to roam and impact capital to take a step back, until the total rate of return on capital escalates to offset the tax.

The overall return on wealth tax comparative to the commercial cost of collection is another aspect of economic efficiency. An argument brought out states that to achieve collection on significant revenue from wealth taxation; they must be so expensive that either they create overwhelming political opposition or they have significant economic adverse effects. Some have, therefore suggested that wealth taxes should have a foundation, not just for revenue but mainly for social and political reasons.

2.3 How the Inclusion of Corporate Assets and Outstanding Corporate Stock Would Double-Count the Wealth of Corporations

Following the payment of corporate revenue tax on business incomes, any allocations to shareholders are again taxed as dividends at the shareholder tax rate. Earnings paid as earnings to stakeholders shall also be taxed on the personal revenues tax return of the stakeholder. Due to both levels of tax, a regular company can be a less appealing form of enterprise than any other corporation which explicitly pays the owners revenue and deductions. Pass-through entities shall be sole ownership and partnerships, limited liability firms and corporations for federal tax purposes. Excellent tax planning can, however, frequently lessen the influence of dual taxation and leverage the structure of the company for other gains. Moreover, given that the highest individual rate is now above the most senior corporate rate and that a firm can retain its income instead of passing all the amounts to the shareholders, in some cases a regular company may be the best tax-beneficial option.

Also, if the company pays the investors a dividend, these transactions are subject to income tax at the corporate level. The individual is nevertheless not required to pay dividend self-employment tax, and qualifying bonuses. Most dividends of US corporations can be taxed at the rate of capital expansions and not the highest marginal tax rate of the individual. Finally, the bonuses rewarded to an investor dynamically involved in the company do not undergo the Medicare surtax of 0.9 percent or the remaining investment income tax of 3.8 percent that is levied on taxpayers of higher revenue.

2.4 Behavioral Effect of Wealth Tax

Tax increase leads to two effects: The Mechanical Effect (M) and the Behavioral Effect (B) M is the added revenue from the rise in rates. At the same time, B is the loss of revenue because the base decreases due to various behavioral reactions (tax avoidance). With the tax on wealth, the wealthy will undoubtedly find methods to cheat the system by disclosing less wealth, concealing wealth outside, attempting to make highly questionable charities, and so forth. Wealth tax advocates often ignore or underestimate behavioral responses to a small group of wealth holders ‘tax inevitably. The United States estate tax shows the behavior of avoidance. According to economists Lawrence Summers and Natasha Sarin, the existing property tax (a form of tax) is generating revenues far lesser than one might expect because of avoidance. It appears plausible that the percentage of tax avoidance is almost 60%.

Base erosion due to the waiver of particular assets is the highest risk of implementing wealth tax. The wealthy can avoid tax by transforming a part of their wealth into untaxable assets. This discredits the policy and does not accomplish the wealth distribution ultimate goal that the wealth tax was hoped for. Exemptions, therefore, trigger the behavior of avoidance, which in particular favors those who can place their wealth in assets free of charge. Increased taxation of the rich will increase their incentive to use such legal and illegal behavior of tax evasion. To work efficiently, wealth taxes must vastly increase the available resources to the IRS to avoid police tax, establish a global system that reduces the efforts made by the wealthy to transfer their money to other countries. To track wealth holdings in the police sector, international cooperation should be established, and a more consistent international tax regime should be facilitated. And with their challenges, this comes. Tackling tax evasion means political will, influence and discipline.

2.5 Wealth Tax Populism and The Municipal Market

In this campaign season, populist animosity for wealth disparity rises again. This has sparked focal point tax proposals by both Sens. Bernie Sanders and Elizabeth Warren in the left-wing of the Democratic Party.  Their campaigns represent a vast electoral bloc that the whole financial community should, therefore, take seriously. In particular, the municipal bond market is right in the middle of a mistaken fiscal policy mix, if it becomes more extensive in the general elections. A first municipal bond is undoubtedly a form of wealth. If fortunes are to be a tax imposed reasonably, all sorts of wealth must be included: stocks, real estate and municipal bonds, among others. The taxation of municipal bonds, for the first time in American history, would be on the drafting tables of the tax committees.

In view of South Carolina v Baker’s 1988 decision as to the prevalent judicial precedent, it is difficult to imagine how its rationale for bond directors might differ. The Court’s landmark decision found that the tax-exemption of muni bonds is derived politically in the context of a policy of Congress according to Article 1. At the tiers advocated by influential candidates, municipal bond principal taxation would be much more expensive for their wealthy investors than interest taxation would be. A bond principal’s 2% or more annual tax would collect much more federal revenue than its interest taxes at current levels with current tax and market rates. It is impossible to see how this dissuasion of ownership can help governments and municipalities to issue wealth-taxable bonds. If Muni Principal is excluded from a tax on wealth, it becomes a clear, and most well conspicuous shell company for the wealthy elite that will easily attract public attention. The ensuing negative press for the whole municipal industry might potentially jeopardize taxation of the muni interest.