The subject of a wealth tax has been discussed in political debates of late. Two Democratic candidates for President in the 2020 election espoused this position, a position some have labeled as radical. The point which I have yet to see made is that we already have a wealth tax, and it’s being paid by virtually every American. It’s not called a wealth tax and it’s not levied by the federal government. It’s called a property tax and its levied by almost all state and local governments.
For many Americans, their home is their most valuable asset; sometimes their only substantial asset. For some Americans, their car is their most valuable asset. Both are almost always subject to a property tax. It varies widely from state to state and from local government to local government. In Pikeville Kentucky, where I live, the total county property tax is 0.42574%. (County, Library, Agricultural Extension Service, Health, Soil Conservation). The city school tax is .74%. The city tax is .14%. The state tax is 0.122%. This is a total tax of 1.42774% on most of the wealth of the people who live in Pikeville, which is paid every year, based on the value of the asset in that year.
I am not an accountant, but I can get a lot of information from the internet. (Keep in mind that there are thousands of exceptions to the figures I will quote in this essay.)
What is the issue about a wealth tax, by whatever name? The issue is, what kind of wealth is going to be taxed. I have heard about some of the wealthiest people in America paying almost no income tax. According to recent press reports, Jeff Bezos paid so little income tax in 2011 that he was eligible for a $4,000 child tax credit! And he took it! How can he live the way he does and, legally, pay practically no income tax? That question has troubled me a lot lately. I heard an explanation last week that makes sense. HE LIVES ON BORROWED MONEY! He borrows the money and mortgages his stocks and other forms of money. On average, the stock market will grow at more than the interest rate. So, instead of taking a salary or declaring dividends, the value of the stock will keep getting higher, even as he takes out a loan on which to live. The stock will always be worth more than his debt. His bank is secure and satisfied.
Bezos doesn’t have to pay off his debt before he dies. And then, guess what happens? His children inherit his money, paying only an inheritance tax on the estate. But no income tax has been paid on the loan which he has taken out to live on. The children pay the face amount of the debt but not the income tax which would have been paid if the money had been taken out as income. They pay no federal inheritance tax on the first $11.58 million (husband and wife both get this exemption): then 40% of the rest. The point is that the estate would have been less, perhaps substantially less, if Bezos had taken out the money he used to live on as a salary and the additional amount he would have needed to pay his income tax. The top income tax rate is 37%, which he would have paid, if the money had been taken out as a dividend. If he sold his stock to live on, the Capital Gain Tax rate would have been 20%, 2% lower than a worker making $84,200.
What are the arguments against this question? The only rational argument against this question that I can think of is that it might cause the transfer of a lot of wealth out of the United States. If you are a citizen of the United States, you should pay this tax no matter where the wealth is located. Failure to pay would constitute your rejection of your U. S. citizenship and your right to live here.
The real argument against this proposal is that the Unites States Congress is controlled by the wealthy people of this country. Not all wealthy people, but a lot of wealthy people; the people I call the selfish wealthy. This is the greatest threat to our country as we know it, and it is led by Mitch McConnell.
A reasonable federal wealth tax of about 1% will permit a reduction in the income tax burden of the average American, the money to eliminate the annual deficit which the United States has institutionalized and pay for the increase in the infrastructure spending that almost all our leaders realize we need to make.
Former Gov. Paul Patton is the chancellor of the University of Pikeville.