Wealth Taxing In the U.S.

Taxing wealth appears to be an issue for the 2020 election cycle. Democrats are pushing ideas for new ones, and we’ll probably see something along those lines if they defeat Trump.

I say “new ones” because, as Tyler Cowen points out, we already have important taxes on wealth. But people don’t seem to want to recognize them as such.

First, we have the capital gains tax, paid on many assets if the sale price exceeds the purchase price. Of course, assets are synonymous with wealth.

Further, the capital gains tax is not indexed to inflation. This means that when the nominal value of your asset goes up faster than your real value, you pay the tax on the nominal increase.

For example, if you bought an asset for 100, and its real value does not change, but there is 20%inflation, you would sell the asset for 120 and pay a tax on the nominal gain of 20 even though you’ve made no real gain. This isn’t a hypothetical: it’s fairly common on vacation homes and stock investments.

FWIW: Indexing capital gains taxes for inflation has been in the policy discussion mix for 40 years now. It doesn’t get passed because it is seen as a tax break for the rich, and as a likely reducer of tax revenue. It is very hard to get across that “break” might be the wrong word if you’re going from something unreasonable to something reasonable.

Capital gains tax revenue is not huge (it is part of federal individual income taxes, and varies from 6 to 12% of those, so between $100-200 B/yr).

But second, property taxes, mostly paid to state and local authorities run close to $700 B/yr. These are mostly paid on real estate. Interestingly, home owners pay the tax on the entire assessed (gross) value of the property, rather than the (net) equity which is their wealth.

Lastly, most people recognize taxes on inheritance as a tax on wealth, but in point of fact, these don’t actually collect that much revenue (about $20 B/yr). The primary reason for this is that low levels of inherited wealth are untaxed, and while high levels of wealth are taxed … there aren’t as many very rich people as most of think.

I think the Democrats should be held to some numbers here: if tax revenue across all jurisdictions is about $7,000 B, and wealth taxes are already 10-15% of that, should they be presenting their proposals as new ideas at all?