Why A Wealth Tax Is A Really Bad Idea
It’s that time of year where tax plans are being proposed in legislatures all across the country. As Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index has covered for 15 years, not all tax plans are created equal. And as a few recent proposals show, not even the bad tax plans are created equal.
While states all across America are moving to reduce their tax rates in an effort to become more competitive for job creation and growth, a “Poor State Alliance” of eight states has emerged and is looking to move radically in the other direction. California, Connecticut, Hawaii, Illinois, Maryland, Minnesota, New York and Washington have picked up where Sens. Bernie Sanders and Elizabeth Warren failed at the federal level and recently announced legislation that would implement a wealth tax — as if most of these states weren’t hemorrhaging enough residents already.
You may remember that Sens. Sanders and Warren proposed a federal wealth tax while unsuccessfully running for the 2020 Democratic Presidential Nomination. The proposal ended up being part of President Joe Biden’s failed “Build Back Better” plan in the fall of 2021.
The U.S. Senate Finance Committee had introduced a plan for a wealth tax on “taxpayers with more than $100 million in annual income or more than $1 billion in assets for three consecutive years,” but the plan was ultimately scrapped as West Virginia Sen. Joe Manchin decided not to support Build Back Better, and the proposal didn’t rear its ugly head again when budget negotiations resumed in 2022. Despite the repeated failure to pass a wealth tax — not to mention the effort by some European nations to get rid of it — the left-wing push for poverty continues.
The wealth tax is dubious for a number of reasons, starting with the very nature of what it taxes. The wealth tax is a tax on the appreciation of assets both tangible and intangible. That means any increase in the value of assets is subject to taxation without a transaction, or “realization,” occurring.
Proponents tout the wealth tax as a tax on income, thereby justifying it at the federal level under the 16th Amendment. However, this is an egregious misinterpretation of the word, as “income” is received as a result of realization. In the early days of the 16th Amendment, the Supreme Court upheld the notion that income needed to be realized in order to be taxed.
But since when has the Constitution been a deterrent to the left?
It surely isn’t for the Poor State Alliance, as several of the plans in these states are either a violation of the U.S. Constitution or of their own state constitutions. California not only wants to tax wealthy households but keep them paying the piper through an unconstitutional exit tax long after they’ve followed the more than 300,000 other Americans who have fled the state (on net) over the last 12 months.
It’s worth noting that the California plan was declared “dead on arrival” by Gov. Gavin Newsom. You know a tax plan is bad when even Mr. Newsom won’t go for it.
Then there’s Washington. The Evergreen State’s constitution explicitly prohibits graduated taxes on property, which is broadly defined to include “everything, whether tangible or intangible, subject to ownership.”
The wealth tax would be a flagrant violation of this provision, considering assets both tangible and intangible are subject to, well, ownership. What’s more, as Washington Policy Center’s Jason Mercier pointed out, is that the state isn’t even finished with the legal fight over the constitutionality of a capital gains tax, which hinges on interpretation of the same provision. Perhaps someone in Olympia ought to deliver a copy of the state constitution to the lawmakers proposing these taxes.
Constitutional permissibility aside, the wealth tax also creates a logistical nightmare for tax implementation and collection, and any revenue projections would inevitably be inaccurate, if not wildly so. Asset values, especially stock values, are naturally volatile, as anyone with an IRA or 401k has witnessed in recent months. One year could result in appreciation but the next depreciation. There’s virtually no reliability in revenue collection at that point.
Furthermore, the lack of realization creates a payment problem for the taxpayer in terms of available cash flow. The taxman demands money, so to pay up, taxpayers will either have to pay out-of-pocket or cash-in on their gains — a process that will then likely subject them to even more taxation through the capital gains tax.
No matter how you look at it, the wealth tax is a killer of prosperity as it disincentivizes investment with prejudice. Furthermore, as Taxes Have Consequences shows, when Americans, especially the wealthy, are overburdened with taxes, they look for legal “escape hatches and loopholes” to avoid taxes.
One way is by “voting with their feet” and taking their capital with them. The members of the Poor State Alliance are already seeing a mass exodus of Americans looking for economic prosperity and freedom in states like Florida, Texas and North Carolina. The last thing they need is a tax that’s going to drive more of their economy out of state. But alas, it looks like it’ll be the first thing they do.
Jonathan Williams is Chief Economist and Executive Vice President of Policy at the American Legislative Exchange Council. He is coauthor of Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index. Follow him on Twitter @TaxEconomist. Nick Stark is Director of Tax and Fiscal Policy at the American Legislative Exchange Council. Follow him on Twitter @NJStark7.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller News Foundation.
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