Proposals for a tax on wealth frighten me. Take for example a recent editorial “The Conservative Case for a Wealth Tax” by Ronald McKinnon in The Wall Street Journal. Mr. McKinnon first argues that increasing the income tax rate of high earners would be for various reasons ineffective in raising federal revenue. He claims that “income inequality . . . [a] justifiable concern for tens of millions of Americans. Reforming the income tax system is commonly seen as a principle way to reduce inequality.”
His solution is “a modest levy on overall wealth of the very rich would allow lower incentive distorting income tax rates for them and everyone else.”
Let’s look at Mr. McKinnon’s definition of the wealthy:
. . .wealthy people live much more off returns from their asset holdings. . . taxed at a lower rate than wage income. They may receive imputed rental income from multiple homes and automobiles, art collections or yachts, which the federal income tax misses altogether.
Time out! Just what multiple home segment, art collectors, yacht owners is Mr. McKinnon talking about? Most millionaires don’t own an Italian villa, let alone a second home. From my national sample of 944 millionaires, as profiled in Stop Acting Rich, “in fact 64% . . . never owned a vacation home, beach bungalow, or mountain cabin. Not even a lean-to or tree hut in the woods.” And most millionaires don’t own art collections. In fact, according to the IRS analysis of the 2007 706 estate tax returns, only 9% of the decedants with an estate of $2M or more owned art that had any market value. Also, in my research, I found that seventy percent of millionaires have never owned a boat or yacht, not even a raft. Among decamillionaires, 66% never owned a boat of any type.
And if you want to put a wealth tax on their cars forget about the $300,000 Ferrari. The most recent vehicle purchased by a millionaire cost just over $31,000 [median]; for a decamillionaire, $41,997.
Mr. McKinnon claims that this new federal wealth tax in addition to the federal income tax would provide a “fairer tax system.” It is certainly not a fairer tax system in terms of rewarding those people who are best at transforming income into wealth.
The wealth tax . . . would require households list all their domestic and foreign assets on, say, December 31 in the relative tax year. . . . a large exemption of $3 million that effectively excludes more than 95% of the population, a moderate flat tax – say 3% on wealth so defined – could be imposed.
Given this scenario, a household worth $5M would be required to pay 3% of the $2M ($60,000) that exceeds it $5M level of wealth.
Mr. McKinnon claims that another advantage of his system “is that it would hit old wealth along with new wealth.” The only problem with the “old wealth” concept is that there just isn’t enough it. One of the great myths about the wealthy in America is the inherited theme. More than 80% of millionaires are self made. Plus according to the IRS, only about 2% of the more than 2.2 million seniors who die each year leave this earth with an estate of $2M or more. And I find that more than one-half of those who inherited their wealth are high economic achievers on their own.
One of the most common forms of building wealth is by investing in income producing real estate. In The Millionaire Next Door, I cited a national study conducted by a scholar at the Treasury Department which confirms this. Especially interesting were the findings related to the millionaire next door archtype whose net worth consisted mainly of equity in a closely held business [in this case exceeding 65% of the total]. For those who own real estate businesses the average total income realized from all assets and all salary, wages, and income combined was only 2.99% [approximately 3%]. What if the owner of a real estate investment company had a personal net worth of $5M, almost all in real estate? His expected annual realized income from all sources would be just 3% of his net worth or just $150,000. He would then be required to pay a 3% wealth tax on the $2M not exempted, $60,000. This would reduce his income to $90,000 before he pays his income tax. People like our real estate millionaire might find it less desirable to build wealth past the $3M threshold or at all.
There is something inherently unfair about the proposed wealth tax. Most people who are wealthy saved and invested; they lived below their means. The frugal lifestyle is the hallmark of the millionaire next door. Contrast him with someone who lives a high consumption lifestyle. Because he has lived high on the hog he will now be rewarded. His high income will now be taxed at a reduced rate, also proposed by Mr. McKinnon in the editorial. But at the same time the Abe Lincoln story of the real estate investor grows dim. He is going to be taxed more heavily because he built wealth and established financial independence.
A wealth tax is not something new. It’s promise of equality has failed miserably throughout recorded history. More often than not it became a way to confiscate wealth from those who earned it. The final step in having a totalitarian government is the confiscation of wealth. The first step is to conduct a census of wealth regarding every household in the country. Imagine the potential power given to those who have access to such a list. That’s why I’m frightened. Such a list could be leaked (not a remote possibility). Those revealed, especially those who live well below their means, may likely encounter hatred and even worse from their neighbors.
The right of citizens to privacy is a sacred one in America. For this reason alone, the govenment should not be allowed to require it citizens to submit an annual balance sheet/wealth statement. If you are wealthy, it’s soon enough when your heirs have to submit your estate’s tax returns after you have moved on.
Discrimination against “the rich” has been the go-to tactic for the political class, and they have been rewarded for it. Wealth, and wealth creation is one of the most misundertood facets of life today. We are trained from a young age that to demonize things that are different than us is wrong. The movies show us time and again that when we look deeper, people are all the same inside. And yet what we find with the wealthy is that they tend to be very different. They work harder, save more, live on less. Perhaps this uncomfortable truth is why it is still ok to hate “the rich” all the while hoping to be them some day, or more acurately, to have what they have, without doing what they’ve done.
Excuse me. How is it that the rich lobby and successfully pass tax breaks that were supposed to be temporary. Tax breaks they said would trickle down to everyone else. But that didn’t happen, did it? Instead a market bubble resulted and everyone else was on the hook for bailing them out. The jobs that were promised ended up being unemployment in the double digits.
All people have asked for is a return to tax rates prior to the temporary tax cuts, and somehow that is class warfare. No, what it is – is pure greed. No matter how bad the budget shortfalls get as a result of the ‘temporary’ tax cuts, it’s suddenly frightening confiscation.
I’ve a copy of your book and I respected you at one time. Not so much if you continue on like this.
Uh, Steve? I’m not understanding your rancor towards Dr. Stanley. Did we read the same note? The post I read doesn’t refer to the Bush era tax cuts, or any other types of tax breaks either positively or negatively. It refers to a proposal by Ronald McKinnon to change the basis for how we tax. Currently our annual income and consumption is taxed. Mr. McKinnon suggests the government should instead (or perhaps in addition) tax a persons overall wealth. His proposal penalizes people for saving and investing their money in our economy! This is a fundamental structural change that could have broad circumstances. I understand Dr. Stanley’s alarm.
@Steve,
“But that didn’t happen, did it?”
It did happen, after both tax cuts by the Bush Admin employment jumped up. The market bubble was not caused by tax cuts, but by irresponsible borrowing AND lending. It was caused by people over leveraging their credit and living lives they really couldnt afford.
“All people have asked for is a return to tax rates prior to the temporary tax cuts, and somehow that is class warfare”
Ah-ha!! See therein is the problem. If you want to return to prior tax rates then that means tax increases across the board, not just the “wealthy”. So it is class warfare when you dont want your taxes returned to Clinton levels and only the “wealthy”. If you want to blame the budget shortfall on the tax cuts then you must give up your tax cut as well.
Amen Sam! I wish people would choose to work hard, do hard things and be happy. Opposed to being angry and selfish .
My husband and I have lived well below our means ever since we got married 10 years ago. We live on ½ of our net income. This week, we’ll be paying off our mortgage. We have enough stocked away for both kids to attend 4 years of college and well on our way to financial independence.
If what McKinnon proposes is done, it’d be utterly unfair to people like us.
Steve, you must be a part of the occupy Wall Street crowd? Please leave, take a shower, and work on your reading comprehension skills. Dr. Stanley’s post had nothing to do with tax breaks for the rich, but since you brought it up, what tax breaks to the rich are you referring to? Everyone that I know that makes $250,000 (what our government calls rich) pays 40% or more in income taxes; every time they get a raise they move to a higher tax bracket. You must understand that there is a difference between income tax and capital gains from investments.
The government owes so much money and has so many people living on subsidies that the only people left to take money from to pay everyone else, are those that have actually sacrificed, worked hard, and made something of themselves. Taxing someone on their net worth is the same as stealing.
The idea of taxing wealth is discrimination towards the savers and investors. What about the guy that made good money during his career but spent it all on fancy vacations and eating out twice a day? Are you going to tax him on past vacations and meals? Of course not; instead you tax the person that has purchased assets -real estate, stocks, businesses, art, etc.
It’s time for all those living off the tax payers to stop looking for more ways to tax the go-getters and start standing on their own. Government subsidies enable poverty instead of preventing it.
Steve, FAIL. I like the simple philosophy of “If you don’t work, you don’t eat. (Don’t get mad at me, God said that.) If people got hungry enough, they would find a job and stop waiting on “fill-in-blank” government administration or program to solve THEIR problems. Now, obviously I’m not talking about those UNABLE to work, I’m talking about those UNWILLING to work. Wise man once told me, “there are 2 types of people in this world: those willing to work, and those willing to let them.” If you choose to be the latter, then don’t STEAL my money which I worked for.
The wealth tax proposal certainly feels wrong. It is basically taxing money that was already taxed once when it was earned and will be taxed again (at least any appreciation) when the asset is sold. Although, when you think about it, property taxes are a form of wealth taxes. Why have property taxes not generated the same sort of outrage and fear from Dr. Stanley?
I looked up what countries have wealth taxes — not surprisingly most of them are in Europe. For example, France starts taxing above 800,000 Euros at 0.55% and progresses to a top rate of 1.8% at about 17 million Euros. So, McKinnon’s 3% proposal is awfully high. I was also surprised to see what a small percentage of tax revenue the wealth tax generates for France (about 1.5% of its total tax revenue).
Although I join him in opposition to a wealth tax, I think that Dr. Stanley is a bit paranoid to be “frightened” about inevitable totalitarianism and confiscation.
There was a good article about Warren Buffett in Time Magazine this week that touched on some ideas that he had for improving the tax system. Interestingly, many of his ideas are counter-intuitive for someone who is basically the ultimate millionaire next door.
@JWILL
Those who earn $250,000 are not paying $100,000+ in income taxes. Their last few thousand are being taxed at a 40% rate… there is a big difference!
Inc. magazine published a fascinating story about life for entrepreneurs in Norway, home to some of the highest income tax rates in the world. According to the article, most Norwegians are actually pretty sanguine about the taxes that they pay, seeing it as payment for services that they mostly feel is worth the expense.
However, Norway also has a wealth tax. The article pointed out that business owners, just as Dr. Stanley predicts, often find themselves in a nasty catch-22: even if your business made no money this year, you still have to pay the wealth tax on the value of the business itself! What will you do for the money? Sell a portion of the business? Borrow it? Doesn’t seem too constructive to me.
I’m all for everyone paying their share, but Dr. Stanley points out correctly that a wealth tax would disproportionately penalize those very Americans whose conduct needs to be emulated, not excoriated.
I do agree that a “wealth” tax is definitely not a good idea. It’s essentially double taxation. What I Think this discussion needs is clearly defined definitions of what a millionaire is.
For most of his posts, Dr. Stanley refers to millionaires being people that have a net worth of over $1 million. Fair enough and that applies to this specific post. However I have read other posts by Dr. Stanley where he decries the taxation of millionaires talking about the millionaires who have spent years, even decades building their net worth to over a million.
Most of the ideas out right now are for setting additional taxes on people who have a net income of at least a million dollars in a year. That’s a huge difference when compared to your average millionaire, and something that needs to be more clearly stated in. Dr. Stanley’s posts (not necessarily this one, mind you).
I don’t see why it would be so hard to have a progressive capital gains and dividends tax for individuals just like our income tax. But perhaps I’m being naive.
This proposal is theft, pure and simple, and a gross invasion of privacy. I’m not even near the net worth level targeted, but like with all taxes, (uh… government invasions) it starts small so as to win support and eventually rolls down to encompass nearly everyone. If this looks to become reality, I would join Gov Perry in his secession plan. The 50% who are looters and moochers beware. You’ve pushed too far. Who is John Galt?