"Mirror, Mirror on the wall what's the fairest tax plan of them all?" asked the weary Tax man.
"A sales tax, though be fair, a tax on total wealth is fairer to all," the mirror replied.
Do I believe all the talk of tax reform is anything more than a fairy tale? No. Getting all of the special interests and political parties to agree on real tax reform is nearly impossible, leaving us with the poisoned apple of a tax system based primarily upon taxing income. Thus, the princes remain princes, the paupers remain paupers and the middle class remains in a tax-induced coma working one of every three days for their government. The total wealth tax is the "kiss" that can free the middle class from its slumber without hurting the princes or the paupers.
"The subjects of every state ought to contribute towards the support of government as nearly as possible in proportion to their respective abilities, that is, in proportion to the revenue which they respectively enjoy under the protection of the state." -Adam Smith
The time has come for consideration of tax reform which provides long-term solutions to our government budgetary issues. It is time for a simple and fair plan that raises significant capital, while stimulating economic growth. It is time to create an enchanted land where everyone pays for the government services they receive. A small percentage tax on wealth is the solution to these issues. So I present this magical tale of tax reform (where the tax tail cannot wag the economic dog).
The Setting of Our Tale
Once upon a time in a land so very near:
Citizens of the kingdom (especially middle class citizens) were pounded at all levels by Sir Taxalot (an evil character in shining armor who took their earnings by raising taxes). Sir Taxalot had implemented a massive and confusing tax code, filled with exemptions and complications so that the citizens did not even know how much tax they were paying. Sir Taxalot's assistant, the wily Jester A.M.T., was especially confusing and unfair as he enjoyed sneaking up on the unsuspecting masses. Consumerella with her sales tax and Lord Flattax with his flat income tax have on occasion attempted to defeat Sir Taxalot, but neither offers sufficient fairness to the masses. Prince Valu-it studied the problem for many hours and concluded: (i) income based and sales based taxes do not tax citizens in proportion to their abilities to pay; a total wealth based tax does, (ii) using the tax system to implement social policy makes bad tax policy, (iii) a balanced budget is necessary to the long-term economic well-being of the kingdom, and (iv) any tax increase should be approved by a 60% majority in both houses of Congress in two consecutive Congresses. The fair kingdom had amassed a Federal debt of approximately $7.5 Trillion which was hiding under the bridge to prosperity waiting to attack the unsuspecting children of the kingdom. The current federal budget was approximately $3.1 Trillion and growing. Eventually the current cumulative state budgets (in the neighborhood of $1.75 Trillion) could be funded with an add-on percentage. The poverty rates in the kingdom were rising each year. According to Federal reserve figures, the current wealth of citizens of the kingdom was over $67 Trillion Gross wealth for individuals and nonoprofits. Prince Valu-it also confirmed that there is over $100 Trillion of institutional/corporate wealth. Thus a wealth tax averaging 2% will raise over $3.0 Trillion dollars; more than the current federal budget.
Prince Valu-it
Our hero, Prince Valu-it, has set out to battle Sir Taxalot by implementing a fair taxing system based upon wealth rather than income or sales. His plan is as follows:
- Abolish all federal taxes except the "Total Wealth Tax" and a small sales tax to fund indigent health care and an outsourcing tax to protect the kingdom's labor force. All taxes means all (income, employment, excise, estate, etc.)
- Impose a tax on total wealth based upon the fair market value of assets owned by all individuals and entities.
- Rates of tax - Individuals
- Real estate - 2% for primary residence and 2.5% for all other real estate (except agricultural)
- Retirement assets (IRAs, 401k's, Options, nonqualified plans, etc.) - 2%
- Agricultural - the lesser of 1% fair market value or 2% agricultural value.
- Other assets - 2.5% (the only exemption is up to $100,000 for cars, jewelry, and tangible personal property)
- U.S. Residents who are not citizens - U.S. Wealth as above, plus 1% non U.S. wealth (no foreign tax credit except as required by treaty)
- For persons over age 65, retired and with total wealth of under $1,000,000, the applicable rate is 1% for the first $1,000,000 of wealth.
- Rates of tax - Entity/Institutions
- Public corporations - 2.5%.
- Charities, religious organizations and other organizations currently exempt from income tax - 2% (except real estate used primarily for worship - 1%)
- Retirement trusts other than IRAs (including government) - 1%
- Closely held corporations, partnerships, limited liability companies, trusts, and other entities - 2%
- The only entities that are ignored are revocable trusts and single member limited liability companies.
- Foreign assets owned by U.S. Citizens and entities - 4.5%. Beneficial ownership of assets in a foreign trust is considered ownership for these purposes.
- Persons who renounce citizenship and seek to remove current assets have a 15% wealth exit tax for the protection of those assets on during the exit.
- The fair market value is the gross fair market value (including Goodwill) - not reduced by debt, and not reduced by depreciation. Just as under current law the value is established based upon a willing buyer and willing seller with neither being under the compulsion to buy or sell. There is no discount for minority or partial interests in family contexts. Life insurance is valued at cash surrender value.
- The tax is paid based upon the fair market value of a taxpayers' assets for the prior calendar year calculated by averaging the values on March 31, June 30, September 30 and December 31; payments are made quarterly by all taxpayers. Taxpayers can file jointly or individually. Joint property is treated as 50% owned by each joint owner.
The Battle
Prince Valu-it knows how difficult it is to change the system Sir Taxalot has been implementing over the past 90 plus years. However, he has the shield of simplicity and the sword of fairness that he can use in his battle.
Under the current system, those who have not accumulated wealth have difficulty doing so because they are taxed as they try to build wealth. They are taxed on their earnings. Therefore, they have no opportunity to build wealth because the kingdom takes over 1/3 of the earnings (in payroll and income taxes). Under the Total Wealth Tax, citizens can build their wealth, while those for whom the system has already worked are taxed on their wealth at the same small rate paid by those building their wealth.
There are some new concepts in this fairy tale. However, the plan really is quite simple as the kingdom has been valuing assets for many years in tax contexts -- estate taxes, real estate taxes, franchise taxes, personal property taxes, intangibles taxes to name a few. Marketable securities and cash accounts are easy - each year we look at the value of assets on a quarterly basis. This is all easily verifiable. Real estate is also easily valued as most states tax real estate based upon a value. Closely held entities will be valued and the valuation will last 3 years. The cost of this should be comparable to the accounting fees for a 3 year period. Similarly, entities/institutions will be able to value their assets and the valuation will be valid for 3 years.
Some of Sir Taxalot's legion of dragons will say that it is too difficult to value assets. Yet, the kingdom is already doing so in both the market place and in taxing systems. The kingdom will have as tools for enforcement financing applications, comparable sales, and sales within a period of time after the returns are filed. The jewelry, antiques, gold and coin market may be difficult to monitor. However, the plan will use casualty insurance records as one compliance device. The simple return will require a declaration as to those specific assets as well as other untitled assets and cars. As an additional compliance device, coin and precious metal dealers, antique dealers and jewelers will file form 1099 type statements as to their customers for transactions involving $1,000 or more in any one year.
Some citizens of the kingdom have felt concern that an individual who spends all their income without saving or accumulating any wealth is unfairly advantaged because they pay no tax. Therefore, where the wealth tax is less than $1,000 in a year and income is greater than $50,000, a 2% gross income tax (on wages, dividends and interest) will be applied. That of course is much less than such taxpayer is currently paying. In addition, it is important to recognize that such wealth (earned and spent by the taxpayer) will still be taxed, as the recipient of such funds will have the wealth and be subject to the tax.
Other citizens have been concerned about middle and low wealth retired persons. Therefore, the tax rate for them is 1%. Surely, they can make a 1% per year contribution for the federal government services and benefits they receive.
Under the plan, charities also pay a small percentage of tax. The kingdom has many charities benefiting from government protection. It is only fair that they pay a small share for such benefits. Of course, their other taxes are repealed - employment, excise, etc. - so overall they should be advantaged by the change.
Retirement accounts are also taxed at a small rate. The taxpayer is effectively paying a small "pay as you go" amount rather than a huge lump sum at the end (whether that is by distribution or death). Again, the wealth being accumulated and protected by government services should be subject to the tax.
Paying tax on gross wealth rather than net wealth is fair. Rather than encourage debt as we have done in the current tax system, the total wealth tax treats debt as a neutral factor. Debt is used as a tool for increasing assets and wealth. That wealth requires protection by the government and should be subject to tax. Why should someone who enjoys a $400,000 asset (with $200,000 of debt) be tax advantaged over someone who enjoys a $400,000 asset with no debt? This is also similar to the current system of taxing real estate.
There are certain double taxes that occur under the total wealth tax - i.e., tax at the institutional level and tax at the individual level. However, both the institution and the individual utilize government services and build wealth. Therefore, both should be taxed on their wealth. This double taxation is much less than the income taxes which have been double or even triple taxed at high rates through a combination of payroll, income, corporate and estate taxes.
Prince Valu-it's royal court has advised him that the economy would be stimulated by such a taxing system because the middle class would be motivated and would have more investing power. In addition, the wealthy would not have to time their transactions to take into account capital gains and losses. Those holding stagnant wealth would be the group primarily disadvantaged by the system. Some have wondered whether the tax encourages spending rather than savings. First, is that a bad result (the wealth still ends up somewhere for taxing purposes)? Second, that is a choice for the wise citizens of the kingdom (not the government); if they would rather spend than pay a small tax on their wealth, then they are free to do so. To the extent there is a disincentive with any tax, then it is better that such disincentive hinder the will to save than the will to earn.
Prince Valu-it will present his concept to the masses and hopes they will rally in his fight against Sir Taxalot who for many years has indicated that he would reform the system. However, Sir Taxalot has never had the courage to undertake major reform; rather he has only built upon the current system making it more complicated and oppressive.
The Moral of the Story
If Prince Valu-it can defeat Sir Taxalot, the impact on the kingdom will be dramatic. His system should generate well over $3 Trillion annually in revenue. for the kingdom. This can be used as follows:
-$3.1 Trillion for the current federal budget (adjusted by a reduction),
-Any excess used for debt reduction.
Eventually, the citizens of the kingdom will demand that state and local taxes be rolled into this plan in place of the existing tax systems. Of course such a plan would require the cooperation of states and a fair allocation of the "state" dollars collected by the federal government. However, the citizens will cheer for Prince Valu-it as they are relieved of the burden of filing multiple returns.
The biggest benefit of this plan is that it allows the citizens of the kingdom for whom the economic system has not yet worked, but who are willing to work, to accumulate wealth which will then be subject to tax (while still growing). Those for whom the system has worked, who already have wealth, pay tax on that wealth, but at rates which allow such wealth to continue to grow (and at rates equal to the rates paid by the masses). Poverty rates will decline. Businesses are subject to tax at a relatively low rate, under a relatively simple system.
Prince Valu-it realizes that Sir Taxalot has an army of wizards who will attack his plan as unworkable, too different from the existing taxes and unfair to someone. Prince Valu-it understands the plan is not perfect (Winston Churchill said, "The maxim 'Nothing but perfection' may be spelled 'paralysis'"), but he believes that it can provide a workable structure for a fairer, simpler taxing system which, if implemented, would allow the citizens of the kingdom to...
Live happily ever after...