Recently Matt Talbot of Vox Nova offered up the following plan for tax reform:
I propose that there is a one-time, 20% federal tax on all financial assets over $2 million – assets in IRA’s and 401(k) plans would be exempt, provided the particular accounts were held on, say, September 15, 2008 (this would prevent using retirement accounts as an anticipatory shelter.) Yes, the stock and bond markets would take a hit; can’t be helped, and the stock market is way over-valued anyway, by historical standards. The stock market should be there to finance capital investment, not to enrich Wall Street greedheads.
In the comments my co-blogger Darwin had some negative things to say about this plan. Truthfully, though, I think that properly implemented a one-time wealth tax could work pretty well. In fact, I would say that the main problem with Matt’s proposal is that it is much too modest.
For one thing, as was noted in the comments to his post, restricting the tax to financial assets over $2 million excluding IRAs and 401(k)s is not going to raise much revenue. And the more exemptions you have in the system, the more likely it is that the rich will just hire tax attorneys to hide their assets and avoid the tax. To deal with these problems, I would make the wealth tax all-inclusive.
Since wealth inequality is much much greater than income inequality, this would be a highly progressive measure. However, without a lower limit, you might worry about the impact of this proposal on the poor. To offset this, I would institute a guaranteed minimum income. The minimum income level would have to be pretty low to avoid work disincentives and keep the plan fiscally responsible, but it would be high enough that even in the first year it would be enough for the poor to pay the tax. Unlike the wealth tax, the guaranteed minimum income program would be ongoing, and would be in addition to rather than instead of all existing federal assistance programs.
Going forward, I would replace corporate taxes at the federal level by raising the capital gains tax rate to 23%. Finally, I would simplify the tax code, eliminating all deductions and replacing the current bracket system with two brackets: 10% for income under $100k, 23% for above that.
Finally, to ensure that the rich don’t hide their assets to avoid the tax, I would deputize every store clerk in America as an IRS enforcement agent. Try as they might, wall street greedheads would not be able to avoid the tax. They could bury their gold in the backyard if they wanted, but as soon as they dug it up to buy a new yacht we’d get ’em.
Do you get the joke yet? The proposal I’ve been describing already exists, though my description of it (while accurate) is a bit atypical. It’s called the Fair Tax, and is generally considered a far-right proposal.
This framing of the Fair Tax derives from Larry Kotlikoff’s book Jimmy Stewart is Dead, and it is a good example of how the way you frame a political issue is often as important as the substance of the issue. When I first read his description, I though it sounded like a crazy left-wing idea, because of course I *know* that a wealth-tax would be horrible for the economy, even if it was just a one time thing. By contrast, I imagine a lot of progressives like the idea of a one-time wealth tax, but don’t like the idea of a sales tax because they *know* sales taxes are regressive. But of course the Fair Tax is both a one-time wealth tax *and* a sales tax. (Kotlikoff imagines having two booths set up a supermarket, one for Republicans where you pay the Fair Tax, and one for Democrats where you pay its progressive alternative, which of course is actually the same thing. He even suggests that if paying at the store looks too much like a sales tax for Democrats, the store could set up the booth in another building and allow you to pay your tax before hand).
Granted, the fact that you describe a proposal in one way rather than another shouldn’t make a difference in how we judge the merits of the proposal. A rose by any other name, and all that. But it does matter. If you called roses Obama-blossoms they might well smell worse to Republicans and better to Democrats.