(Yahoo! Finance) - Politicians have continued to call for higher taxes on wealthy taxpayers as a means to fund the government. The most recent of these calls has come from Sen. Elizabeth Warren of Massachusetts, who has renewed her previous proposed legislation with the Ultra-Millionaire Tax — a 2% annual tax on household net worth between $50 million and $1 billion, and a 3% annual tax on household net worth over $1 billion. While this tax would raise significant revenues for the federal government, it is not without its challenges.
What Warren’s Ultra-Millionaire Tax Would Do
According to Warren’s proposed tax plan, the Ultra-Millionaire Tax is a 2% or 3% wealth tax that varies based on the taxpayer’s net worth. Taxpayers with a net worth between $50 million and $1 billion would pay a 2% wealth tax. Taxpayers with more than $1 billion in net worth would pay a 3% wealth tax. All other taxpayers, including those with less than $50 million in net worth, would not be subject to any additional taxes.
For instance, a taxpayer with $100 million in net worth would owe $2 million in incremental taxes annually. Meanwhile, a taxpayer with $2 billion in net worth would owe $60 million annually in incremental taxes under this plan. Conversely, a taxpayer with up to $50 million in net worth would face no incremental tax liability.
Warren estimates that this proposed tax plan would affect only 260,000 taxpayers. In turn, it would raise $6.2 trillion over the next 10 years, according to CBS News. Other stipulations of this tax plan include an increased budget for the IRS to help audit wealthy taxpayers, a minimum audit rate for those with high net worth, as well as a 40% exit tax should a wealthy taxpayer attempt to avoid paying this wealth tax by renouncing their citizenship.
Why Supporters Say A Wealth Tax Could Work
The key advantages of a wealth tax proposal like Warren’s center on the magnitude of what it can raise and who it would come from. For instance, there are few levers politicians can pull to generate $6.2 trillion in tax revenue over a 10-year period. These revenues could then be deployed to help make things like health care and housing more affordable in the U.S. As the U.S. continues to face high levels of inequality, a wealth tax like this could be a way to tap into this wealth.
Relatedly, a wealth tax can specifically tax funds from a small number of taxpayers on income that is otherwise difficult to tax. According to ProPublica, the ultra-wealthy have amassed large fortunes while paying very little tax on this money. The ultra-wealthy are not paying low amounts in taxes because they are evading the tax law. Instead, the U.S. tax code, as it is currently written, is not able to collect taxes on wealth. By employing tax planning strategies like “buy, borrow, die,” the ultra wealthy have been able to grow their wealth and pass it on to their descendants, all while paying low amounts of this wealth to the U.S. A wealth tax could put an end to this practice.
Perhaps the biggest advantage of Warren’s proposed wealth tax is that it’s less extreme than other proposals. For instance, Sen. Bernie Sanders and Rep. Ro Khanna recently proposed a 5% annual wealth tax on billionaires. While a 2% difference may not seem extreme, 2% extra in wealth taxes annually can add up quickly. For instance, a taxpayer with a net worth of $100 billion would see their wealth deteriorate to $35.8 billion after 20 years under Sanders and Khanna’s proposed wealth tax. Under Warren’s tax plan, their wealth would only go down to $54.4 billion.
Where Warren’s Wealth Tax Could Face Trouble
A key concern with Warren’s proposed wealth tax is the constitutionality of such a tax. According to the National Taxpayers Union Foundation, a tax on wealth represents an unapportioned direct tax. Unlike an income tax, which became constitutional under the 16th Amendment, other taxes must be apportioned across states, meaning they would have to generate income proportional to the state’s population. Thus, if 12% of Americans live in California, then 12% of the wealth tax would come from California. However, the proposed wealth tax would be difficult to implement if it were to tax all billionaires the same, since they are not evenly dispersed in the population — there is a greater percentage of billionaires in California than in other states.
Another hurdle would be implementing a wealth tax. Income can be easily assigned to taxpayers since it is based on transactions and pay stubs. However, a wealth tax requires significant estimates. For instance, it can be easy to determine the value of a taxpayer’s stock portfolio each year. However, the value of a company can be far more volatile. These estimations can be even more difficult when trying to assess the value of real estate (especially when many of the ultra-wealthy own unique homes without a comparable), jewelry, artwork and sports franchises.
Lastly, the ultra-wealthy have access to significant resources, such as attorneys and financial advisors, who can be employed to identify and execute tax planning strategies to minimize tax liabilities. For instance, Barron’s reports that the ultra-wealthy can rely on these resources to create trusts and corporate structures, as well as to fight the assessed value of their net worth in a way that minimizes their wealth taxes. These taxpayers can also evade a wealth tax by failing to report all of their assets or strategically locating them outside the U.S.
While many of the potential issues related to Elizabeth Warren’s proposed wealth tax make it seem as though her proposal is a long shot, it can be difficult to ignore the growing trend in the progressive movement’s plans to raise taxes on the rich. Like Warren, Sanders and Khanna, Zohran Mamdani has made noise by pledging to raise New York City taxes, and the state of Washington has just signed a millionaire income tax into law. As this trend continues to grow, rich taxpayers need to keep a strong focus on the potential for a higher income tax liability on more than their income – their wealth.
By Nathan Goldman, Contributor
