Let’s not got caught up in terminology
What is the truth…
In an editorial on the The Hill “Biden and Democrats lie about wealth tax, and so much more” by Liz Peek. I find this editorial offensive. Her first argument is about the difference between a wealth tax and an unrealized capital gains tax. I would agree with her argument that in probably 100% of the cases the extremely wealthy are in that category because of stocks bought and not sold. Hence delaying capital gains taxes.
Liz Peek also discusses tax rates, business tax rate being 25% and a teachers making $31K having a tax rate of 12%. The business is obviously paying at a higher rate. The teacher is able to deduct classroom materials purchased to reduce the tax base. The teacher is not living an extravagant life style on the less than 28K after subtracting $3,000 of taxes. The business meanwhile is deducting, rightly so employee and capital expenses often to a point of not paying any taxes. That is on top of most businesses are in locations where local real estate taxes are waived. If the teacher is lucky enough to find and buy a house, the local real estate taxes are not waived.
The Current Tax System is Flawed.
Anyone who denies this is a moron. Liz Peek’s description of those who believe what she calls the democratic lies. Biden has said consistently that he would not raise taxes on those making less than $200K a year. The number is not important. What is important is the fact he never promised not to raise taxes on the wealthy. In fact he endorsed new taxes on the wealthy.
I have a hypothetical for you to ponder.
An extremely wealthy business man decides he wants a $1B yacht. He finances the yacht through a bank. The yacht is then used to wine and dine customers. He gets a tax break because his personal yacht is for business. He is able to deduct the interest on the bank loan because of the business nature of the yacht. For years later he sells the yacht for $1.2B pays off the lean and buys and pockets $200M which is taxed.
Unless he can find another way to claim the $200M was actually a business expense.
What is true is the tax system provides advantages to the wealthy to reduce their tax burden. Often has been reported by Donald Trump having years when he paid no income tax. Those of us who chose to work for these individuals rarely are able to take advantage of these loop holes.
Basically the tax code is flawed.
A wealth tax.
Elizabeth Warren’s plan would be to impose a wealth tax of 2% on wealth over $50M. For someone in this category the additional tax adds up. Jeff Bezos is worth $177B. That would make his tax bill at least $3.54B. He also would be required to pay taxes on his income.
For Donald Trump his net worth is $2.5B. That means he would pay at least $50M in taxes, even with all the other deductions he has.
The truth is as Janet Yellin has pointed out is most wealth is in property such as stock or real estate. The value of each increases over time increasing a person’s net worth but not his bank balance. The bank balance increase when the property is sold at a profit. The profit is capital gains, so the wealth tax is a tax on unrealized capital gains.
The question is what will this do to investment? What will be the unintentional consequences? It might divert this capital into charitable foundations.
A deduction less tax code.
I’ve often wondered if a deduction less tax code would work. A scaled tax rate would still be order, with as an example:
- The first $15K not taxed.
- The next $50K taxed at 5%
- Between $65K and $1M taxed at 8%
- Over $1M taxed at 15%
All income including stock options (purchase price), interest, dividends and capital gains at sale would be taxed. No expenses would be deductible. The simplified tax code would make it that IRS would only need to verify income reducing the need for audits.
In this scenario, Jeff Bezos takes a salary from Amazon and the numerous boards he sits on. He also gets stock from all the above and the stock has value. His income would be the sum of the salaries plus the sum of the value of the stock. He also might need to sell some stock to buy a yacht. The capital gains from the sale of stock will be added to his income. He probably has deposited some money in the bank. Interest would also be income. Much of his $177B net worth would be differed capital gains from old stock. So his income for the year might be just $10B. His tax bill would be $1.5B given this hypothetical.
The numbers might need to change. But the truth is long term this would distribute the burden of taxes better. The tax rates would be lower for everyone.
An unintended consequence of this type of system might be a reduction in charitable donations.
But the truth is…
The wealthy have many advantages not available to those less fortunate. They always will. Taxation should not be one of those advantages. The tax system needs to change and those with the most need to pay more.
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