The Ultimate Left-Wing Tax System

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.

25 Responses to The Ultimate Left-Wing Tax System

  • How many families have over $2 million in financial assets? One, maybe two million? That would be about 2% of the population.

    Democracy!!!

    Why don’t ‘we’ just take it all?!

    We see here (VN) on display infallible ignorance of the functionings of the real world. But hey, that also is true for the White House and Senate.

    I no longer read (torture myself) VN – near occasion of sin. I do not need to. A few years ago I completed my post-doctoral field work in the fever swamps of erudite, left-wing ignorance.

  • I drive a 14 year old car, and my wife drives a 13 year old car. The value of my house was just a little more than my salary when I bought it, and its value today is a fraction of my earnings. My wife and I have never vacationed in Europe, though we have been to Toronto to see her brother’s family once and flew to Cancun for our 10th anniversary. Most of my suits are purchased used from eBay. Our splurges are for Catholic schools and various Catholic and other charities — we give away between 10 and 20 percent of our gross income every year. Through 30 years of 50-60 hour work weeks and diligent saving and investing, we have now apparently accumulated too much money. Boy, have we been stupid. I don’t often get intemperate, but my response to those who make this rather unbelievably stupid proposal is go pound sand and keep punding until your brain cells work again.

  • What is your take on Fairtax?

    If you think it’s anything other than absurd deceptive nonsense, which sounds wonderful, allow me to set you straight.

    I was a big fan of Fairtax — until I saw the fine print, and asked Fairtax leaders some questions.

    Fairtax claimed for 13 years and in 8 books, and in over 4,000 speeches that “Only people pay taxes”. IN fact, Fairtax leader Boortz claimed that “only people pay taxes” was the #1 principle for Fairtax.

    But then we see this odd sentence in Boortz’s Book, ironically named “Fairtax The Truth”

    “Under our plan, all city and state governments will pay to the federal government a tax on all their spending — on all their purchases, on services and goods, including labor (wages).” Fairtax The Truth Book, page 138, by Neil Boortz.

    We called a Fairtax spokesman and asked about this — will California state government have to pay 15-18 billion dollars to the federal government? Will every city government have to pay it too?

    Is this is ADDITION to the “tax on personal consumption”?

    Yes — Fairtax leaders told us emphatically. California government will have to pay 15-18 billion dollars to the federal government. Every city, and every state government, will have to pay.

    This is central to Fairtax. Not only is it in their fine print, this is basic to their math. This trillion dollar tax on city and state government is how their math “works”.

    We have Fairtax’s goofy explanation for this hidden tax, see these two blogs.

    http://fairtaxunmasked.blogspot.com/

    http://fairtaxfineprint.blogspot.com/

    If you still think Fairtax is on the level — or even sane — I have a bridge to sell you.

    Yes, we need a new tax code — and we need honesty and openness.

  • Just to be clear, I am not suggesting that Schell is stupid — just his proposal.

  • I think the key difference is in more than the framing. It appears to morally offend Matt that people who own wealth in the form of financial investments exist in the first place. His tax seems based on the idea that if someone owns a bunch of stocks and bond, that money is somehow being kept away from society, and so society should go take 20% of it away and use it for more useful purposes. What he doesn’t seem to be able to understand is that, however offensive it may seem to him that large investors own more than most other people, that invested money is busy keeping the economy going, capitalizing businesses, providing people with jobs, etc.

    A fair tax goes after money as it is being spent, but ignores money which is invested. If you make a large income but save most of it, then you would pay comparatively low taxes and increase in wealth. Which is pretty much the opposite of what Matt’s proposal seems motivated by: a desire that there not be wealthy people owning investments.

    Now, of course, this is why the fair tax is actually a very good idea, and Matt’s is a destructive one.

  • Darwin,

    I agree with you about the motivation point. No one ever fed the hungry by hating the rich.

    However, I disagree when you that that with a consumption tax “[i]f you make a large income but save most of it, then you would pay comparatively low taxes.” If you do this you will end up paying more in taxes, its just that you will do so later on when you spend the extra money you earned by saving.

  • Mr. Black Adder, You clearly do NOT understand the FairTax.

    You do not correctly describe how it works. The FairTax is NOT a one time tax on wealth. It ONLY taxes consumption as it occurs. That IS what people benefit from. People do NOT benefit directly from work, the work gives them the ability to earn, then consume if they choose! Someone does not benefit from accumulation of wealth until they spend it! The FairTax encourages accumulation of wealth, which is good for the economy, and good for people of ALL walks of life. When someone decides to benefit from that accumulation they will pay taxes without exception or loophole at same rate as any other family consuming ABOVE their poverty level. That’s because NO ONE effectively pays tax until they consume above their poverty level.

  • Mark,

    I think the specific FairTax proposal has some big flaws, but I think the general idea of replacing existing taxes with a consumption tax makes sense.

    Ron,

    A consumption tax is equivalent to a one time tax on wealth (plus a tax on income going forward).

    Suppose I have a million dollars in assets. With a one time 23% wealth tax, I pay $230,000 in taxes, and am left with $870,00 to spend on whatever I want. With a 23% consumption tax, I can buy $870,000 worth of goods and services, on which I will pay $230,000 in taxes.

  • Exactly right, DC, subject to the proviso that I’d substitute consumption tax for Fair Tax. Whether the Fair Tax is the best consumption tax alternative is still an open question to me. I am more of a fan of the broad-based expenditure tax advanced by William Andrews of Harvard and more recently by Sam Nunn when he was a Senator of Georgia. Basically, that tax would work much like our present income tax, but allow a deduction for all contributions to savings. All withdrawals from savings at any time would simply be added to the base. In theory all income would be taxed over one’s life time as one spent it. Ideally, the need for the estate and gift tax would be obviated as the decedent’s savings would be entirely withdrawn in order be distributed to heirs.

    This tax is a consumption tax that treats gifts as a form of consumption. It has the advantages of (i) easy development from our current tax (which due to IRAs, 401(k)s, etc is already a hybrid), (ii) ability to accomodate desirable policy objectives such as a deduction for charitable contributions, and (iii) ability to accomodate vertical equity adjustment — i.e., rates can be progressive. Some would criticize thiss flexiblilty as allowing for the very type of complexity that is the subject of current widespread derision. But as a tax lawyer whose practice includes a lot of sales tax disputes, I find it naive for people to think that (i) the sales tax is simple (tax lawyers find this notiion humerous) and (ii) the Fair Tax will somehow forever avoid the array of popular exemptions common in state sales taxes everywhere.

  • If you do this you will end up paying more in taxes, its just that you will do so later on when you spend the extra money you earned by saving.

    Hmmm. Would you tax charitable giving and inheritance, or would they be exempt?

  • Would you tax charitable giving and inheritance, or would they be exempt?

    I believe that the tax applies to charitable contributions but not to inheritance.

  • Ideally, the need for the estate and gift tax would be obviated as the decedent’s savings would be entirely withdrawn in order be distributed to heirs.

    But wouldn’t that be double dipping to the extreme? If a man gifts his grandson fresh out of college $25K from his savings, would the young man have to pay tax on it or would the grandfather have to pay the tax above the amount? Either way, tax was paid on the 25K and then would be taxed again as the kid spends it. That doesn’t seem just to me (neither does sales tax on used cars either!), plus it’s one of those hidden-but-in-plain-sight type taxes which irk me so.

    I used to rail against the income tax years ago, but I have come to think it an equitable method – even if it is far from that right now. I wouldn’t like anybody to have to pay a dime of income tax until they reach a certain threshold before any taxes kick in at all and that threshold would be much higher than it is now. I would also like the structure to be more family friendly and to be an incentive for having/keeping a family, etc. I still think there would be need for the EITC, but it might be constituted a little different.

    While I think certain consumption and excise taxes are legitimate, many strike me as nothing more than a means for the “representatives of the poor” to institute a heavily regressive tax on those they champion. It’s like a cynical shell game where they pay lip service and buy votes with largess from treasury. I’ve never heard of a diligent advocate of the poor protesting cigarette, alcohol, used car, and fuel taxes – nor the lottery. All of which are either targeted toward the poor or simply too regressive.

  • Mike, I don’t believe the Nunn USA tax would require estates to withdraw all savings.

    DC, the FairTax is a sales tax. You can make all the gifts you want but the recipient would pay taxes on whatever they buy with the gift. Essentially, it would hurt charities and eliminate the estate tax.

    My biggest problem with the FairTax is the rate. 30%. That’s asking for a rampant black market. Another problem is that even with the rebate, it’s far too regressive. Then there’s the problem that it’s also a one-off wealth tax that hits everyone’s retirement which wouldn’t be as big a problem if it wasn’t so regressive.

  • My biggest problem with the FairTax is the rate. 30%. That’s asking for a rampant black market.

    This is a serious concern, but I think it could be addressed by having a VAT instead of a straight sales tax.

    Another problem is that even with the rebate, it’s far too regressive.

    It’s only regressive if you look at annual income instead of lifetime income. Under the current system once a person retires they are basically done paying taxes (they might still pay some capital gains tax, but they don’t pay any more income tax). Since the rich spend a larger proportion of their income after they retire, looking at annual income creates the illusion that the rich are paying a lower percentage than they actually do.

    Then there’s the problem that it’s also a one-off wealth tax that hits everyone’s retirement which wouldn’t be as big a problem if it wasn’t so regressive.

    Right, a switch to a consumption tax is equivalent to a one time wealth tax, plus you are effectively increasing the long term capital gains rate and taking away the investment incentives created by IRAs. Whether the incentives in favor of work and savings going forward is something I don’t think you can tell without actually running the numbers. My understanding is that economists who have looked at this have generally concluded that the positive incentives outweigh the negative ones.

  • Actually a FairTax (or any similar consumption tax) would eliminate the capital gains tax. Or alternatively, it makes all investments tax deferred which is the same thing (in the same way that traditional and Roth IRAs are identical if your tax rates are the same at contribution and withdrawal). In fact, the Nunn USA tax is just that; our current income tax with investments tax deferred. This is identical to our current income tax minus investment taxes like capital gains and dividends. There are behavioral differences between these plans but they’re mathematically identical (assuming identical tax rates). They all make savings more attractive by treating all savings as if they were placed in IRA’s.

  • RR,
    Yes, you are right that the Nunn USA Tax would not tax distributions upon death, but I view that as its largest defect. I see no good reason to encourage perpetual intergenerational wealth accumulation. It seems more sensible to me for all income to be taxed during the earner’s lifetime as he spends it. Conceptually I see no reason to distinguish between inter vivos gifts and testamentary ones, and no reason not to consider gifts as just one expenditure choice.

    RL,
    In your example, grandpa would receive no deduction for his gift, which would be treated just as any other expenditure. Under my theory the gift should also be regarded as income and taxed to the grandson, but only when he spends it. I don’t see the injustice of taxing all consumption, and I think it is sensible to view all one’s income as consumed as one spends it, and see no reason to not treat gifts as just a spending option. Basically, my system would treat all uses of income equally. No preference or discrimination as between spending, saving or giving. Economists have long criticized the income tax as penalizing savings; a Nunn Bush type tax (I think mine is a slighly improved version of it) would not encourage savings — it would just not discourage savings.

  • Actually a FairTax (or any similar consumption tax) would eliminate the capital gains tax.

    The FairTax would eliminate the capital gains tax, but it wouldn’t eliminate taxes on capital gains (in the same way that it would eliminate the income tax but not taxes on income).

    Suppose I make $1 million in long term capital gains. Under the current system I pay $150,000 in taxes. Under the FairTax, I would end up paying about $230,000 in tax out of the same money.

  • Mike, I don’t know if the Nunn tax would tax inter vivos gifts but I don’t think any gifts should be taxed. I see no reason to distinguish between transferring money from my right pocket to my left and transferring money from my pocket to your pocket. I want to tax wealth, not the transfer of it. An ideal consumption tax taxes only the wealth created and only once. If you want to attack wealth, have a larger initial tax or a continuous tax (e.g., a property tax). Taxing transfers discourages them and encourages immediate consumption.

    BA, yes, but under the current system, your capital gains are made on post-income-tax principle. Under the FairTax, they’re made on untaxed principle. In the end, a 23% income tax and no capital gains tax leaves you with the same tax burden as the FairTax.

  • BA, yes, but under the current system, your capital gains are made on post-income-tax principle. Under the FairTax, they’re made on untaxed principle. In the end, a 23% income tax and no capital gains tax leaves you with the same tax burden as the FairTax.

    Fair enough, but as you pointed out a while back, a 33% flat tax with a $30,000 exemption looks a lot like the current system in terms of progressivity. So any regressive effects of the FairTax could be eliminated by making the rate 33% instead of 23% and raising the amount of the prebate.

  • BA, that’s exactly what I’d like to see. That and a VAT instead of a sales tax. Better still a digital VAT card that applies the rebate instantly at the point of sale. It would prevent people from living off their rebates like welfare since you have to actually spend money to receive it.

  • I’m trying to think if I like or dislike this feature, but it strikes me that a consumption-based tax system would encourage people to put more value on intangible assets and status rather than strict consumption, depending on what things the tax applied to.

    Say I make a lot of money and I consume relatively little but instead put away huge amounts in savings. I also contribute large amounts to certain charities. If the companies and charities I give money to respond by providing me with status, influence, and access to opportunities and facilities, these things would effectively be discounted because they wouldn’t actually be bought items.

    Now we’re talking about pretty non-tangible assets here. Though they might be highly useful in getting political and commercial opportunities. So maybe the attraction of gaining these “untaxed” advantages (which you’d be purchasing pretty inefficiently anyway) would not be that high. But it would be sort of interesting if such a system resulted either in people investing more in social institutions or developing something a bit more like an aristocracy.

  • DC, that’s interesting. Of course, since those intangible goods are costless, you’ll get plenty of supply. So while we may get more of them, they won’t be any more valuable than they are now.

  • Well, as I think about it, probably the amount of the consumption tax isn’t enough to actually effect much cultural change. 30% is a lot, but if those who are raking in truly staggering amounts of money get to keep all their earnings until they spend it, the extra 30% probably isn’t even that bad a deal.

    However, I would note that goods such as status or influence are not necessarily costless or of infinite supply, though maybe “intangible” is the wrong word for what I mean.

    The kind of thing I was thinking of was: Say someone has a truly massive amount of wealth, such as he might spend on a private jet and a really out-of-this-world vacation home or island. But somehow, consumption is just out now. So instead, he endows a new wing to the hospital which is named after him. Not, however, totally out of the goodness of his heart. Because it’s with the implicit understanding that it’s “usual” as a business expense for the hospital to court donors with flights to conferences on private Caribbean islands, and having their names and the names of their company splashed on lots of hospital materials, and being invited to swank board dinners and made the guest of honor at banquets and such.

    Basically, if certain kinds of consumption are basically a way of signalling “I’m a really important guy” and consumption somehow becomes unfashionable, does this drive people into other ways of signaling the same thing?

    If so, pushing people to signal importance by endowing charities and owning private companies and sitting on boards and such might actually be more beneficial for society in many ways. It might be a good thing. Though it might also, in some ways, lead to a more static society in that it would tend to reinforce ties between members of an existing elite. (So, for example, the hospital and the other members of the hospital board might be more likely to go to their donor’s company for various goods and services rather than really searching for who has the best product at the best cost. This closing of opportunity might make it harder for a new company which isn’t connected to a known grandee to make it.)

    As I say, now I think about it coolly, I don’t really think a 23% or 30% consumption tax would cause this, but this idea that people might trade consumption for status and influence did strike me as interesting.

  • DC, business expenses wouldn’t be any cheaper for businesses under a consumption tax. And now that I think about it, it wouldn’t even affect the costless intangibles. Under the current income tax system, companies can provide you with pre-tax benefits like dinner. Or it can give you the money, and you have to pay income tax then buy dinner with post-tax money. Nothing changes under a consumption tax except you pay the tax when you buy the dinner instead of when you receive the money. It’s the same tax. This stuff gets confusing because we often forget that when we buy something we’re buying it with money we already paid income tax on.

  • The thing is, people are not necessarily profit maximizing rational actors. Often they get hit up about things because they are loss averse but only recognize certain losses as “real”.

    Two classic examples are the way that people talk about mortgage and charitable donations. If you think about it, it makes no sense to take on more mortgage debt in order to maximize your deductions or to make charitable donations strictly to maximize your deductions. A deduction, after all, simply reduces your taxable income. And yet, you’re always better off with more income and paying the tax on it than giving up the income entirely.

    People do not always think this way, however, probably because they don’t have any choice about witholding and so they see the only thing they affect as being what they file and how much they get back.

    No, we could also theorize that people are mistaken about their motivations when they claim that they maximize their mortgage debt or make large donations at the end of the year in order to minimize their taxes, but I’ve had enough people claim to me that they refinanced and took money out of their house or made a large donation right at the end of the year in order to minimize their taxes I’m moderately convinced that some people act that way even though it’s not rational.

    I think the question would be: would suddenly imposing a very large consumption tax cause people to look for other ways of getting benefits they might previously have purchased. Would people become more averse to purchasing luxuries and instead try to secure “free” stuff via social status and power.

    Now note, this would only apply if certain types of very expensive purchases are basically just signalling behavior and not something people actually place that much value on in and of itself. And like I said, as I think about it, I think the increase in take-home income for the very rich would cancel out the effect in this case and so a 30% fair tax would not have this effect.

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