From Bad to Worse
The Biden administration proposes a new wealth tax that would be impossible to administer and distort economic incentives.
If you thought the White House was done devising bad economic policies, think again. First was the idea to pass a stimulus package that many economists agreed was too large and worsened inflation; then came the plan to shrink the domestic oil and gas industry; next, a push to remake and enlarge the welfare state that never had popular support and, mercifully, faltered in Congress; and now, tucked away in President Biden’s budget proposal, comes a provision for a de facto wealth tax. In some ways, this is the worst idea of them all, though it would be so hard to enforce that its damage would be limited, even if it passed.
Textbook economics argues that wealth taxes are the most distortionary and least efficient of all taxes. Governments need to raise revenue somehow, ideally via taxes that are relatively easy to collect and don’t alter behavior too much by, for example, discouraging people from working or investing. It follows that consumption taxes are efficient, since consumption (spending) is easy to observe, and people need to do it. Income taxes have become relatively easy to collect information on, since most employers need to share pay data with the IRS, and they don’t discourage work at low to moderate income levels. But it’s hard to observe wealth: the IRS does not collect information on it, many assets held by rich people are tricky to value (such as fine art), and the value of wealth can be volatile (consider the Bitcoin millionaire). Taxing wealth also encourages people to shift their assets abroad or into difficult-to-value assets, or simply to understate what their wealth is worth. Many European countries have given up taxing wealth, and those that do impose wealth taxes derive only a small share of revenue from them.
But the Biden administration is undeterred. Its Billionaire Minimum Income Tax would force households worth more than $100 million to pay a 20 percent tax on all their income, including unrealized capital gains on at least their liquid assets. How the IRS will determine which households are worth $100 million is unclear; the agency does not have the capabilities or manpower to do such a thing. And considering the volatility of markets, on what day would this income be assessed? If you lose money, do you get a credit? Why is it called a “billionaire’s tax” when it applies to millionaires, too? What types of assets will be subject to it? So far, no answers have been given to these questions, likely because no good ones exist.
The outcome of such a policy will be that rich people will shift into illiquid assets like private equity, which is difficult to value and would, it seems, not be subject to the full tax. This would deepen disparities in who can access certain markets since most ordinary people can’t hold private equity. It would also reduce transparency and incentives for companies to go public. Yet the White House expects to raise $361 billion over the next ten years from the tax.
Pushing this tax may be good politics, especially if it doesn’t go anywhere. And it probably won’t—because it may be the administration’s worst policy idea yet.
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