Introduction by
Peter R. Reily
Almost exactly a year ago, I, along with the rest of the tax blogosphere,
was writing about Warren Buffett complaining that he wasn’t paying enough
taxes. He had paid about seven million. With his current net worth at 44
billion, Mr. Buffett would get change back from a billion under the
plan, but he would still be paying quite a bit more than 7 million, actually
more than seven hundred million. Mr. Devany told me about his 2-4-8
plan in a comment on another post. I challenged him to make a case
that a wealth tax (that is the “2″) is actually feasible. Why don’t
you be the judge ? Be wary though. People who make intelligent
comments on this blog frequently end up being trapped into guest posting.
Eugene Patrick Devany is
a retired litigation attorney turned tax reform advocate. The plan he
supports is an outgrowth of a Law School paper relating behavioral
psychology and law to contemporary problems. He also holds an advanced
degree in Public Administration.
Forbes, August 17, 2012
Creating New Wealth by Taxing Net Wealth
by Eugene Patrick Devany
The 2-4-8
Tax Blend is a tax reform
plan that combines sales, wealth and income tax bases in ways that would not
have been feasible just a decade ago. Volker (2009) and Simpson & Bowels
(2010) did not consider a value added tax (VAT) or net wealth tax because
Mr. Obama had already taken the fiscal plunge with his health care reform.
Without Tim Geithner, the president has no economic advisors left (except
perhaps for Mrs. Obama) to tell him, “I told you soâ€.
Mr. Romney
supports a tax cut of at least 20% and low capital gains rates. All options
are on the table. He has shown the vision and guts to radically innovate by
joining divergent ideas and ideologies (see Bain Capital, Romney Care, Salt
Lake City). Perhaps it is just a coincidence that his most important primary
endorsement came from net wealth tax supporter, Donald Trump (“The America
We Deserveâ€, 2000) and his most important decision to date has been the
selection of VAT supporter, Paul Ryan (“Roadmap for America’s Future†2010).
Unlike Mr. Obama, Mr. Romney seems to be the kind of man that will treat job
creation and our economy with the determination of the 1939 Manhattan
Project (and likely with the same level of secrecy). He spent enough years
in France to learn the shortcomings of how its tax blend has been
implemented. France imposes a net wealth tax on top of a progressive income
tax (“soak the reach†method) rather than using the wealth tax to reduce the
income tax rates (“coerce productive investment†method).
A 2% net wealth tax could easily replace the job killing payroll taxes.
Using a VAT tax on business sales and net wealth in addition to the income
tax enables the design of a new tax code with profound political, economic
and business incentives. A dozen critical economic problems not considered
by other tax reforms are resolved – all without increasing government
spending.
1. The blend of wealth, sales and
income tax bases enables the mathematically lowest rates possible and
provides resilience to the economy as a whole. It makes it easy to raise and
lower tax revenue by making very small proportionate adjustments to the tax
rates with negligible impact on the different economic sectors.
2.
A 2% individual net wealth tax (excluding $15,000 cash and retirement funds)
enables the individual income tax rate to be lowered to a flat 8% rate for
all.
3. The wealth tax exemption for $15,000 cash
and retirement funds is intended to help persons of modest means to
accumulate funds to supplement the government’s safety net programs and
further helps to reduce pressure to increase government support spending.
4. A 4% VAT would enable the corporate tax to be
lowered to a flat 8% tax rate. This would give the U.S. the lowest and most
competitive corporate rates in the developed world.
5.
A corporate income tax rate of 8% would enable the return to the U.S. of
several trillion dollars in tax deferred foreign profits without switching
to a territorial tax system.
6. The 8% income tax
rate provides congress with the political leverage for the elimination of
all $1.3 trillion in annual tax expenditures (in over 250 programs) and
greatly simplifies the tax code.
7. The offset
for debt in the net wealth computation effectively results in a 2% tax
credit for mortgages, student loans, credit card and other types of debt
(even though the interest would no longer be deductable from taxable
income).
8. The wealth tax makes capital gains, estate and
gift taxes unnecessary and thereby removes the biggest tax obstacles to
trade and business reinvestment.
9. Replacing
payroll taxes increases worker take home pay (and consumer spending) by 7 ½%
10. Replacing the business payroll tax on labor encourages job
creation without government spending (as does increased consumer spending).
University of Chicago Economics Professor, Casey Mulligan, estimated in
September 2011 that each, “percentage-point reduction in employers’
[payroll] costs raises employment by about a percentage point and real gross
domestic product by about 0.7 percentage pointsâ€.
11. The addition
of a wealth tax provides a better tax base for Social Security and Medicare
and removes any necessity for immediate benefit reductions except where
benefits may be excessive or not needed.
12. The net wealth tax
corrects the unintended tax code transfer of wealth from the bottom half of
the country to the top 10%. Half of all Americans now live on only 1.1% of
the wealth (down from 3.6% in 1995). A wealth gap this large has not been
seen since just before the Great Depression of 1929 (when unemployment was
also as bad).
The misuse of wealth taxes in many foreign countries
and in a dozen or so published proposals for adoption in the U.S. have
universally earned the “tax the rich†objection. In contrast, the 2-4-8 Tax
Blend may represent the first time in history that a net wealth tax is being
proposed to help the economy and business and is not intended to raise tax
revenue for the government. Both political parties concede that lower income
tax rates will enhance the economy and 8% is as good as it gets. Since the
wealthy gain most of the benefit from the low flat income tax rates, the
remaining dispositive issue is about the net wealth tax. It is not whether
anyone likes a net wealth tax, but rather how a net wealth tax will change
the economy.
The great Harvard Psychologist, B. F. Skinner taught us that incentives
(“contingencies of reinforcementâ€) may take the form of positive
reinforcement, negative reinforcement or punishment. In taxes we often
equate all tax expenditures (loopholes, deductions, credits, exemptions,
special rates, etc.) with positive reinforcement because they reduce the tax
burden. The Supreme Court has taught us that the Affordable Care Act health
insurance penalty is really a tax. It is perhaps better understood as
negative reinforcement which shapes behavior by reducing the threat or
application of punishment. Psychologically, one can escape or minimize the
tax penalty by obtaining health insurance. A net wealth tax also serves as a
negative reinforcer (as in “use it or lose itâ€). People don’t like negative
reinforcers and that is exactly why they work. A person who properly invests
assets in business can expect a return in excess of 2% and thereby avoid any
threat of a net loss in wealth. In other words, a net wealth tax is a
coercive but effective way of getting wealthy people to invest in business
without wasting $1.3 trillion in tax dollars each year. You are not supposed
to like it.
Valuation has been identified as the biggest technical
obstacle to a net wealth tax but dozens of countries have managed to get the
job done. In February of this year, CNBC reporter Joe Kernen asked Warren
Buffet about a “tax on a person’s total wealth†to which Mr. Buffet
reportedly replied that he didn’t “think that’s the best way to go, in part
because it’s hard to value assets like farms.†The very word “tax†comes
from the Latin “taxio†which means approximation and that is all that is
really required. Internet databases of market values with massive computer
power make the task of valuation easier than it would have been just a
decade ago. Valuation can begin with a definition of net wealth as the
average, cash, fair market value of assets less the value of legal and
enforceable debt. The “average†aspect simply adjusts for the fluctuation in
value during the tax period. The “cash†aspect seeks to allow for the
adjustment of an estimated sale price by permitting an offset for all
reasonable and normal costs of a sale. It is essentially the same as a cash
liquidation value. The “fair market†aspect of the valuation seeks to limit
the scope of assets subject to taxation to those items for which there is a
normal and customary market. For reasons of custom, public policy and/or
legal restriction there is no market for ones kidney, a personal copyrighted
item not put up for sale, a wedding ring during the term of a marriage,
personal clothing, food, controlled substances, family bible and similar
items.
The 2% wealth tax would generally be withheld for the
shareholders and paid by the business directly to the government. The stock
value of private businesses may require an inventory of assets and valuation
based upon a liquidation of assets computation. The key difference with a
small business is that the principals of the company may account for much of
the value of the business and their services should not be valued for wealth
tax purposes.
The digital filing of tax returns should be mandatory
rather than optional to enable the full automation the IRS’s processing and
review of returns. There should be no need to furnish an itemized list of
each and every item (unless and until an audit is necessary). Similar types
of businesses can be compared for total assets, payroll and profits and it
should be easy to flag a business that requires an audit. A sale value which
significantly departs from an earlier estimate might also trigger an
inquiry. Over time, the data for income, assets and debt can be refined to
better identify tax fraud. The addition of value added tax (VAT) data will
also enhance the reliability of this process.
The implementation of the 2-4-8 Tax Blend has no significant transition
issues and is doable from a technical and administrative point of view.
Politically the Tax Blend has much to offer both Democrats and Republicans.
The wealth tax represents an ideal tax for the left while a low flat income
tax represents an ideal tax for the right. Both taxes are needed to make the
low rates work and this is fuel for political compromise. The fact that rich
and poor would pay the same low rates makes the issue of tax fairness
difficult to argue by either side. Creating jobs and saving the economy may
also motivate some in Washington to take a serious look.
Post Script
I want to thank Mr. Reilly for the opportunity to write a guest column on
the subject of using a net wealth tax as a part of comprehensive tax reform.
His introduction about Warren Buffet also provides an opportunity to
illustrate how a 2% net wealth tax operates at the top of the spectrum.
It was reported in Mr. Reilly’s August 15, 2012 article titled
“Warren Buffett Benefits More From Deferral Than a Low Rate†that his wealth
increased by $3 billion last year and if “he had to realize those gains,
even at 17.4%, he would have had to pay $522,000,000â€. If he had to pay the
proposed 30% “Buffet Rule†rate the tab would be $900,000,000. The net
wealth tax approach does not tax the capital gain but would assess 2%
against the average principle of $41.5 billion (beginning with $40 billion
and ending with $43 billion for the year). This computes to $830,000,000 –
(an amount less than the “Buffet Rule†computation if deferral were
eliminated and the capital appreciation was taxed as income).
In fact Mr. Buffet only paid $7 million in taxes on income of $40 million
and that is one reason why tax reform is needed. Those at the top really
don’t need the cash income and can hold on to their appreciated assets
indefinitely so as not to trigger capital gains income. From a tax
philosophy perspective it may be better to view a net wealth tax as a tax on
the imputed income that should be realized from the investment of the net
wealth. Passive investments that result in dividends or interest are subject
to an additional 8% income tax. Investments that result in no income or
which encourage the profits to be reinvested in the business will escape
income tax altogether. Increases or losses in the business or stock value
would be adjusted as part of net wealth. The tax structure clearly promotes
both individual investment and business growth. This must be matched by
increased consumer spending through full employment and better wages. The
elimination of payroll taxes as part of the overall 2-4-8 Tax Blend should
keep the economic engine running at peak performance.
The comments to the article have been intelligent and surprisingly
moderate which no doubt says something about the high quality of Forbes
readers. One suggestion was that a wealth tax should not be used with
“assets less than a few hundred thousand dollarsâ€. This suggestion is not
the tax only the wealthy approach (which generally kicks in after
$1,000,000) and is the norm in the dozen or so countries that employ wealth
taxes. The few hundred thousand dollar level is really closer to the
protected retirement fund level and is already accomplished in the 2-4-8 Tax
Blend by exempting tax exempt retirement funds. The 2-4-8 Tax Blend
eliminates all tax expenditures except for retirement funds. This is
justified on the public policy grounds in so far as it will help individuals
to have a better retirement and at the same time keep the pressure off the
government to increase retirement benefits. Seniors, especially those with
homes for which that pay significant property taxes and which require some
expensive upkeep, could face a liquidity problem over time which should
easily be solved by permitting a needs based retirement deferral of the net
wealth tax on the house until it is sold.
Comments in regard to the “IRS auditing burdens†are
legitimate but must be viewed in light of the mandatory digital filing and
the elimination of 250 tax expenditures a/k/a “loopholes†which take up most
of the IRS time today. Aside from business tax returns, all individual
returns will be simplified.
The comment that a, “VAT is a regressive sales tax and similarly has no
place in a discussion of modern tax reform†contradicts the fact that all
modern tax reform in 150 countries has included a VAT†and it is urgently
needed to reduce the U.S. corporate tax rate which is now the highest in the
developed world. The suggested VAT rate of 4% would be the lowest in the
developed world. It is also important to keep in mind that the VAT is said
to be regressive only to the extent that the cost, like all business taxes
and costs must be passed to the consumer for the business to profit. Keep in
mind that labor costs are on average about 70% of business income. The 2-4-8
Tax Blend reduces the 4% VAT by the elimination of the business share of the
payroll tax which on average amounts to 5.25% of income. Thus the 4% VAT
would not be regressive under the circumstances. A significantly higher VAT
rate, which many countries have, would be regressive.
The further suggestion that a gross receipts tax might be better than a
VAT because it would include rental income is simply not necessary with a
wealth tax since the value of the rental property is taxed as part of the
net wealth computation and the net rental income can be taxed as income at
8%.
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