Taxing Proposals

Roy Ulrich

October 12, 2004

The White House has made noises about pushing a national sales tax—thus forcing the Democrats in the position of defending the income tax. Ulrich—of the California Tax Reform Association—argues that a person's income doesn't necessarily indicate wealth. Ulrich proposes a net worth tax on worth above $500,000 as a more fair alternative. It would allow those at the bottom of the income scale to pay nothing—definitely a proposal worth debating.

Roy Ulrich is president of the California Tax Reform Association.

The Bush administration's trial balloon on a national sales tax points to the fact that the other side of the political debate has an aggressive tax agenda to push if the president is elected to a second term.  The Democrats are forced to defend the the income tax and to a lesser extent, the IRS, and argue that it's the price we pay to live in a free society.

A tax on net worth above $500,000—excluding a person's principal place of residence—is the obvious rejoinder.
 
What an individual earns in any given year may not indicate true wealth. Individuals with small yearly incomes may have a large net worth from many sources, including inheritance.  On the other hand, individuals with substantial yearly incomes may have very little real wealth.    
 
On top of a national sales tax—one which doesn't tax necessities such as food, by the way—a slightly progressive tax on net worth should be the Democrats' alternative to the income tax. First, net worth is easy to define: assets (such as cash, real estate and securities) less liabilities (or debts) equals net worth. Bill Gates' rate might be one half of one percent per year. Someone who has a net worth of $5 million to $10 million might be taxed at one-fourth of one percent per year.
 
The Internal Revenue Service would be turned into an agency whose mission would be simplified: determining the existence and value of assets. While that is no easy task, we ought not forget that the IRS currently performs this very function in administering the estate and gift tax.
 
For taxpayers, the task of filling out a return would be simple because, in essence, the return would be nothing more than a net worth statement. And such a statement is not likely to change from year to year unless large numbers of assets are bought and/or sold.
 
Placing a value on publicly held securities would be as easy as looking in the financial section of any daily newspaper. Valuation of hard assets such as real estate would be determined on the basis of the current assessed valuation of property by the county assessor in the vast majority of states that tax real estate on the basis of current assessed valuation.
 
While there is no question that setting a value on other assets and liabilities would be a formidable task, the IRS would no longer be saddled with the responsibility of looking at sources of income, adjustments to income, credits, exemptions, deductions and the other myriad of minutia that currently takes up considerable time during the preparation of or audit of income tax returns.
 
Under a net worth tax, the penalties for substantially undervaluing an asset or attempting to hide an asset should be severe.  In India, for example, if the taxpayer's listed appraisal is grossly undervalued, the government is allowed to purchase that asset for the taxpayer's listed assessment price plus 15 percent.
 
But the single most compelling argument for the imposition of wealth tax is this: Households at the bottom and lower middle of the economic ladder wouldn't pay any such tax at all. 
 
The major argument against the imposition of a wealth tax will be by those who say it will inhibit savings and result in capital flight. The high front-end exemption ($500,000 + residence) should allay the fears of those who believe that the tax will result in lower capital investment.  Furthermore, the evidence collected by New York University economist Edward Wolff suggests there is no strong evidence that the presence of a wealth tax in 11 western European democracies inhibits savings.
 
With regard to the capital flight argument, Switzerland imposes a wealth tax, and there is simply no evidence of capital flight taking place from Switzerland. In fact, the opposite is true.
 
As for the issue of fairness, there is an enormous amount of wealth imbalance in this country today. Between 1977 and 2004, the share of wealth owned by the richest one percent of Americans more than doubled. One percent of Americans now own not quite 50 percent of the national wealth. The Forbes 400, listing the wealthiest people in the country each year, now counts 65 billionaires in the United States. The man at the top—Bill Gates—will indeed pay more under a net worth tax than he does now under the current income tax. Most of the rest of us will pay less tax. Those at the bottom of the income ladder will pay nothing at all. That's as it should be.