Strothman News

The Wealth Tax ‐ Part 2

Dustin Wells, CPA, Tax Specialist

This is Part 2 of Dustin’s analysis of the Wealth Tax. Read Part 1 here.

What are the practical effects of a wealth tax if implemented on Americans? And what are the positive and negative arguments for and against a wealth tax on Americans? In Part 2, we will outline and summarily analyze the stipulated benefits and negatives to implementing a wealth tax. Now knowing a wealth tax, also known as a capital tax or equity tax, is an additional tax on your gross wealth accumulated lets further examine the positives and negatives on both sides.

Positives? What is the main positive of implementing a wealth tax on the wealthiest Americans? Mainly, supporters of the wealth tax point to studies showing substantially increased tax receipt revenues that would more than likely surpass the 2018 & 2019 record setting tax revenues collected as noted. So, what would Washington do with these additional revenues? How and more importantly where would the US Senate allocate these additional tax revenues? Where would these new monies be spent? Well – it depends. However, assuming a wealth tax is implemented we can safely assume Democratic leadership has been elected and voted into office. With that it’s undoubtedly likely, as noted in Part 1, the additional tax monies collected by IRS would be allocated to social and welfare programs as well direct federal payments made to stipulated minorities and poorer Americans in attempt to solve “wealth inequality”. An estimate from the Penn Wharton Budget Model indicates that if the revenue from the wealth tax as previously proposed by Senator Elizabeth Warren were used to finance non-productive government spending the GDP would decrease by 2.1 percent by 2050, capital stock would decrease by 6.5 percent and American wages on average would decrease by 2.3 percent.

Negatives? Contrarians to a wealth tax submit two main negatives to implementation of taxing American wealth. One – a wealth tax would materially stifle economic growth due to financially savvy and experienced American business owners moving money out of the US economy and into other tax favorable foreign markets. Second – a wealth tax would not incentivize “non-wealthy” or middle-class Americans to become more wealthy by growing investments or expanding business operations triggering Americans to move personal investments away from US markets leading to less individual investing and savings activity in US markets and an even larger incentive for Americans at a certain tax bracket to shelter their assets not taxed prior.

So in the name of comparative fairness, a wealth tax would very likely lead to the increases in tax receipts, at least initially, but would not likely maintain over the long term for many reasons we will outline at later date. Also, you’d have to stipulate to inevitable negative economic impact on investments, personal savings and larger economic growth which correspondingly drives the increases in investments due to diminished incentivized motivations traced to the wealth tax. All in all, as evidenced in prior administrations, both foreign and domestic, the more wealth the federal government consumes – or confiscates, if you will – the more individual Americans, especially the “ultra-wealthy”, will move assets out of the American economies then further reducing investment activities and market growth by moving their individual monies sitting in domestic savings, checking and investment accounts into tax-favorable foreign countries and leaving those monies on the proverbial American “sidelines” as opposed to pushing personal capital into stock market’s and personal retirement vehicles deriving growth from those markets.

So… what now? In the next part – part 3, I will analyze in detail the implications of a wealth tax on the US citizenry and how it would be implemented pending a leadership change in November.

Stay tuned… more to come.