Another Way to Look at Wealth Taxation

Taxing wealth is a popular idea. It’s most popular among people who have little or no wealth to tax.

There is a reason for this. Everyone knows that the best tax is one paid by someone else.

Such taxes are, in their very nature, fair and equitable.

Yes, I’m pulling your leg.

But as much as I believe that a wealth tax would be impractical for the simple reason that it would be difficult to collect, a recent exploration of federal spending and wealth concentration made me wonder if a wealth tax might be a reasonable idea after all.

Meet the Benefit Principle

Here’s the basic notion: Taxes should be paid by those who benefit most from how those tax dollars are spent. The Tax Foundation, which is not known as a bastion of left-wing thinking, has this to say about taxes on gasoline.

“While few taxpayers are cheerleading gas taxes, they do embody the ‘benefit principle’ of taxation relatively well. This public finance concept holds that the taxes a person pays should relate to the government services that person receives. In general, drivers benefit from the services that their gas tax dollars pay for, like road construction, maintenance and repair.”

Benefit-principle taxes don’t stop at gasoline. People who fly on airlines pay special taxes. The same applies to fees paid for bridge tolls and toll roads and taxes paid by homeowners.

Another major example of the benefits principle is Social Security. All workers pay an employment tax for working. We do this in the expectation that we will receive benefits when we retire, or before if we are disabled. For a large majority of Americans this is the largest tax they will ever pay.

A tax is good when the person who pays the tax receives the benefit.

Now that we’ve established the principle, let’s consider its connection to wealth.

One of the biggest expenses of government

The single largest expense our nation has, after Social Security and Medicare, is another form of security: defense spending. It was over $600 billion in 2018 and is heading, according to Office of Management and Budget estimates, toward $800 billion by 2025.

What happens if we apply the benefits principle to defense spending just as it applies to Social Security?

Who benefits the most from defense spending? (Hint: It isn’t poor people.)

The logical beneficiary isn’t difficult to figure out. It’s the people who would lose a lot of stuff, like wealth, if the country were taken over by a foreign power or if America became less influential in the world.

Enter the defense tax

Now that we’ve made the connection, let’s see how a wealth tax would fit.  Let’s consider a wealth tax large enough to pay for the defense department. Don’t think of it as a wealth tax, think of it as the “defense tax.”

How much would it be?

Well, it all depends on what level of wealth you tax.

Let the top 1 percent pay it

Let’s pick on the top 1 percent, if only because the rest of us outnumber them so easily.

Back in 1989, as the new wealth concentration was starting to roll, the top 1 percent had $4.78 trillion in assets in a year that we spent $294.8 billion on defense. That figures to a defense tax of 6.17 percent.

Pretty steep.

Back to the drawing board.

Let the top 10 percent pay it

OK, let’s widen the net to the top 10 percent in wealth. In 1989 they held $12.54 trillion in assets. So, the defense tax would drop to 2.35 percent. Not bad. (Full disclosure:  I truly would like to have avoided this because, well, the Burns family is in this group. In most circumstances this would make the tax unfair since it would no longer be a tax paid by others.)

Why the tax would be lower today

As a practical matter, the tax would be a lot lower today because, as so many have pointed out, wealth keeps getting more concentrated. That means the defense tax can be spread over more assets held by relatively rich people.

By 1999 the tax would have dropped to 1.01 percent on the top 10 percent, before starting to rise again.

By 2010 the tax would have been 1.56 percent.

By 2014 the tax would have been down to 1.01 percent again.

By 2015 the tax would have broken below 1 percent for the first time, 0.95 percent.

By 2020 the tax would have been down to 0.88 percent.

If America is about the pursuit and possession of wealth above all else, as many seem to think, this may be the way to go.

What do you think?

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Note to readers: Before sending howls of execration accusing me of being a crazed, pinko communist agitator, let me declare again: I am not advocating this. I’m introducing a concept.

Related columns:

Scott Burns, “The Wrong Headedness of Wealth Taxation,” 12/21/2019   https://scottburns.com/the-wrong-headedness-of-wealth-taxation/

Scott Burns, “Taxes: Don’t Raise the Bridge, Lower the Water, “2/15/2020  https://scottburns.com/taxes-dont-raise-the-bridge-lower-the-water/

Scott Burns, “Taxes and the Long Road to Richistan,” 2/1/2020   https://scottburns.com/taxes-dont-raise-the-bridge-lower-the-water/

Sources and References:

Janelle Cammenga, “State Gasoline Tax Rates as of July 2020,” 7/29/20, Tax Foundation website: https://taxfoundation.org/state-gas-tax-rates-2020/

Whitehouse.com Historical Tables on Federal Finances: https://www.whitehouse.gov/omb/historical-tables/

Federal Reserve data on wealth distribution:  https://www.federalreserve.gov/releases/z1/dataviz/dfa/distribute/table/

This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

Photo: Pixabay

(c) Scott Burns, 2021