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.