The Wealth Tax and Income Redistribution Folly

Member Group : Lincoln Institute

The concept of taxing wealth is gaining ground especially since Sen. Elizabeth Warren and Sen. Bernie Sanders first proposed the idea in the mid 2010’s.   Presently, both senators are calling for a wealth tax of 2% annual tax on wealth greater than $50 Million and rising to 3% for wealth over $1 billion.  Even President Biden is suggesting such a tax makes sense to balance the overspending in our government.

In prior years, there had been a great deal of discussion about wealth inequality in the United States.  In fact, a video depicting “the crisis” paints the picture of a nation in which differences of opinion among Americans between the perceived distribution of wealth, versus the “desired” distribution of wealth, versus the reality of the distribution of wealth becomes painfully obvious.

It is interesting to note that throughout the video the distribution of wealth problem is “solved” by “attacking” income disparity and not wealth disparity.

The fallacy of attempting to solve a “wealth inequity” problem through income redistribution is due to the sheer complexity of the tax code which makes the discussion for the average person mind numbing at best.

Initially I found it strange that extremely wealthy people seemed to favor tax policies encouraging “wealth redistribution”.   It seemed illogical that the super rich would favor wealth redistribution since it would adversely affect them.

Warren Buffett for one as often criticizes the tax code saying that he is not paying the same tax rate as his secretary.

This seeming selfless sacrifice of these very ardent supporters of wealth redistribution almost impressed me. Almost that is until you dissect the reality of their arguments.

In reality, I have never seen such disingenuous comments about wealth inequity as I have seen with the liberal media and the super wealthy. The super wealthy liberals are playing the mainstream media for a fool.

But now, the concept of a wealth tax may come back to bite the very wealthy people who demanding solving wealth inequality with an income tax.

The arguments that the mainstream media use about wealth inequity almost always revolve around income redistribution because the mainstream media does not understand our tax code.

Let me say this is clearly as I can.  Perceived wealth inequity will not be solved by income redistribution!

Income redistribution efforts will actually make wealth inequity worse because income is taxed and wealth is not making it harder for workers to acquire wealth.

Some of the programs that reinforce perceived wealth inequity include the tax code, the charitable deduction for appreciated securities, and the ability to borrow against appreciated assets.

For example, under the current tax code, the “paper gains” on Warren Buffett’s stock is not taxable to him until he sells the stock.  From 1964 to 2012 Berkshire Hathaway stock book value has increased 586,817%!

The basis in Warren Buffett stock determines how much he paid for his stock versus what it is now worth. That gain that Warren Buffett enjoys due to his hard efforts is not taxable until he sells the stock.

But there is a nuance to the tax code in which Warren Buffett can claim a charitable deduction for the market value of the stock he donates even though his basis in the stock may be just pennies. This way he can shelter significant income, subject to certain limits for appreciated securities, without ever having to pay taxes on his gain.  In other words he can have his cake and eat it too.

Due to the sizable fortune that Warren Buffett has, he is also able to significantly limit his “earned income”, because he is able to pledge, if he so desired, his Berkshire Hathaway stock on any loans that he might decide to take rather than to take additional taxable income. The advantage of this for someone like a Warren Buffett is that he would be able to enjoy the fruits of the gains on a stock without having to pay tax on those gains until he created a “taxable event”.

These tax code issues are minor issues to almost all Americans except the super wealthy.

When the super wealthy support income redistribution it is crucial that you understand that they support income redistribution because it leaves their wealth intact.  Income is taxable, wealth is not.

The difficulty with all of this analysis is that it is complicated. It is easier to explain to people that it is income that is creating the problem of inequity versus wealth. As a result of this difficulty the super wealthy are extraordinarily willing to jump on the income redistribution bandwagon because it, quite candidly, does not affect them.

In fact, encouraging income redistribution helps protect their status as the wealthiest of all.

Now that it is President Biden, the progressive “love” for their Wall Street donor base may have just vanished.  Wealth tax proposals are gaining ground and those wealthy people who championed wealth inequality through income redistribution may have just had the tables turned.

But the fallacy of the wealth tax should not be lost on anyone either.

To pay for such taxes, assets may have to be sold to pay the tax forcing growing businesses to liquidate to pay the tax.  Warren Buffett, for example, may pay over $2 Billion per year in taxes under a wealth tax but the question of how he raises the $2 Billion should not be lost on anyone either.

I certainly have no major desire to take care of the financial needs of billionaires, but it is disingenuous at best to not be concerned at all about the impact on the economy of a wealth tax.

A substantially better approach to the federal deficit is to demand government efficiency, change rules on carried interest, change stepped up basis rules for estates while eliminating estate taxes and finally evaluate the constitutional role of government in a free society rather than the explosive growth of a bureaucratic machine that we have now.

So before anyone starts suggesting solutions to the “wealth inequality” is it crucial that you understand the system and the problem or you may only make the situation worse.  Eliminating some of the tax breaks for the super wealthy may “feel” good until you see the cost of that decision on the economy, job creation, and future opportunities for employment for your children.

Frank Ryan, CPA, USMCR (Ret) represents the 101st District in the PA House of Representatives.  He is a retired Marine Reserve Colonel, a CPA and specializes in corporate restructuring.  He has served on numerous boards of publicly traded and non-profit organizations.  He can be reached at [email protected].