An article recently appeared in the Wall Street Journal titled “The Conservative Case for a Wealth Tax.” The proposal is to have a fair exemption, say, $3M, and any amount above this would be taxed each year at 3%. The author, Ronald McKinnon offers an example showing that a couple with $5M would be taxed $60K. I imagine many will think this is hardly enough, those hedge fund managers who make million each year can afford to pay more than this. Perhaps, but in the spirit of “Unintended Consequences” I’d suggest that this tax will hurt some people unfairly.
Take a couple who has made a decent income, $150K-$200K, and after selling their home, decides to take their retirement fund, and rent. They have exactly $4M. They don’t trust the stock market to go back to annual returns of 8-10%, and therefore they only withdraw $120K per year. (Remember, this is a retired couple, whatever their profession, let’s just agree they lived well beneath their means to save this money. They paid their taxes, but invested for the long term, much of it pretax.) The seemingly ‘fair’ 3% is $30K of the excess $1M they have. And it’s 25% of their annual budget. If the entire $120K withdrawal is a 401(k) or pretax IRA distribution, they are already planning to pay about $17K in tax, living off the $103K net. This tax would leave them with $73K.
At $5M, the numbers look even worse for this couple. Planning to withdraw $150K gross, and pay closer to $25K in tax, for a net $125K. Now take off $60K for the wealth tax, and they are left with $65K. Uh, right, they socked away an extra million dollars, but this wealth tax leaves them with a lower annual income. “But Joe, the wealth tax can come off the top, not from the withdrawals.” Agreed. but in the 25% bracket, it would take an extra $80,000 withdrawal to net the $60,000 for the $5M couple. They went from a pretty conservative 3% withdrawal target to $230K, a 4.6% rate. Something about this doesn’t seem right. Yet, when you paint a different picture, the 30 year old Wall Street Exec who has already built a $10M retirement account, the tax doesn’t seem so bad.
When it comes to the tax code, it’s very difficult to have a tax that doesn’t hurt those who are not the intended target. It’s easy to make judgments about who has really earned their money. I for one think there are hundreds of bankers involved in the Mortgage Collapse who deserve long jail sentences. The same folk at S&P who decided when you take enough C rated paper and put together, you can get AAA investments are the ones who pulled Uncle Sam’s AAA rating. These are the people who made us all poorer, along with our children who will inherit the national debt. Why these people are still on the streets (I mean employed and not serving time) I don’t know.
What do you think of the wealth tax? Have you seen any articles on it yet?
I’ve heard politicians talk about a wealth tax. And I think I read in an issue of Entrepreneur magazine that there’s one in Norway. (However, don’t quote me on that.)
Here’s what I think of the wealth tax: I don’t like it. It’s unfair. Presumably, I’ve already paid taxes on my wealth. And if I haven’t that means I haven’t realized the gains on my “wealth”. Which means it’s quite possible I’ll pay taxes on wealth that I may never be able to access in reality. I guess you could account for the fluctuations in your wealth when calculating the tax, but that’s just one more record keeping nightmare Americans have to concern themselves with.
Thanks for the comment! I think it’s possible to save this sum of money i.e. more than $3M, with ‘honest’ work, and to tax it this way after the fact will be rejected when proposed to any congress.
You make some very good, well reasoned points. You have no future in government 😉
Frankly, all this “wealth tax” nonsense strikes me as more political wrangling during an election year. Sadly, there are some so gripped with “us vs. them” fever that they’ll rally behind any measure to force people to pay their “fair share.” Such beliefs are dangerous and harmful, as you have pointed out quite effectively.
I can’t see how you can tax money twice. I earned my salary and pay taxes accordingly. If I save all my post-tax money, I could grow my way into the wealth tax. If I spend every dime I make as it comes in, I pay income taxes but avoid the wealth tax.
I think this would be a new way of encouraging the wrong behavior.
Thanks for the visit and comment Corey. Funny how we can muster up some sympathy for those with “only” $3-$6M. It’s not the huge sum it was when I was a kid.
Yeah, I have to agree with you. It just doesn’t seem right. Money shouldn’t be taxed twice, especially for those with money just sitting there. It would be another factor in addition to inflation/cost of living increases that they would have to fight to have enough money to survive until they die.
There are plenty of people who make gains which are never taxed.
Buy a home and you can enjoy a tax-free capital gain of up to $250K or $500K if married. (You wanna talk about unfair…try being an overtaxed renter your whole life. In the meantime just enjoy your homestead exemption – saves thousands in property taxes in Michigan – and all your other tax breaks and quit complaining..) You can enjoy huge stock gains (untaxed until the gain is realized) and then (as long as your estate isn’t large enough to be taxed) and pass on the gains to your heirs without ever being taxed.
Be grateful that you are able to save and invest. A childless burger flipper working full time at minimum wage probably can’t save, yet pays $500 annually in federal income tax plus another $1100 in payroll taxes. It’s fair to tax the burger flipper who can’t save but unfair to tax massive wealth?
P&B – I understand. I also suspect no two people will agree on what fair really is. You are right that a single person will have $9750 in his standard deduction/exemption, and is then taxed at 10%.
The tax system itself has become so convoluted, so many deductions to encourage this or that. With one child, I pay the same property tax (2/3 going to support the schools) as my neighbor with 4 kids.
It’s interesting you cite the burger flippers. I did this for 4 years to have spending money for college. For me, it was pocket money. My heart goes out to those who need to do this to put food on their own table. For what it’s worth, I agree, the minimum wage earner should not pay federal tax.