‘Feeling The Bern’ Of Wealth Tax Could Mean National Security Risks, More Corruption, And Tax Evasion

Sanders is pushing the tax to fund massive new government spending ventures that include clean energy, affordable housing, Social Security benefits, universal childcare, increased spending on public schools, student debt cancellation, free college, and “Medicare for All”. According to some estimates, Sanders’ agenda would cost anywhere between US$60 trillion and US$97 trillion during the next decade.

However, unprecedented peacetime government spending coupled with a wealth tax that punishes savers would act to raise the cost of capital. That harms the US economy in the long run.

Other countries such as France, Sweden, Germany and Denmark have all experimented with a wealth tax, only to repeal the policy shortly afterward because a wealth tax is simply too costly to enforce. In France, the wealth tax cost more to enforce than it collected.  That would leave Sanders with fewer federal dollars to spend on his wish list.

The wealth tax would result in confiscatory tax rates that would push the rich and their assets abroad. For those affected by the tax, higher compliance costs coupled with the real risk of unfair asset seizures by a bloated US government would greatly increase the reward for tax evasion.

A Threat To National Security

By punishing the savings of wealthy Americans, a wealth tax would cause American ownership of assets to decrease, resulting in a larger share of American assets owned by foreign nationals. Some experts in the intelligence community have long argued that foreign ownership of strategically sensitive US-based assets could pose national security risks.

The Committee on Foreign Investment in the United States is already charged with reviewing various foreign direct investments to ensure they don’t pose a national security risk. A wealth tax that reduces the share of US-owned assets and increases foreign ownership could compromise national security. 

The risk from foreign control isn’t always as obvious as, for example, a state-owned foreign entity buying into a fighter jet manufacturer. Industries such as technology are becoming more critical to national security, and an innocuous investment today could compromise the safety of Americans in the future.

Those concerns may well lead to intervention by the government, preventing foreign investment in areas perceived as sensitive to national security. Unfortunately, this precautionary measure would limit the amount of foreign investment that is necessary to offset any decline in domestic investment.  As a result, a wealth tax would negatively affect American worker wages, potentially harming the poorest Americans. 

Unfair Asset Valuations And Confiscatory Rates Lead To Corruption And Tax Evasion

Prior to 1970, the US. state of Illinois taxed business – but not individual – personal property. 

In March 1970, the Chicago Tribune reported that a federal grand jury was investigating an alleged ring of personal property tax “fixers.”  Nine months later, Circuit Court Judge Mel R. Jiganti found Borrie Kanter guilty of soliciting a bribe to reduce the personal property taxes of Acoustics Development Corp. Six months later, Kanter pleaded guilty in Federal District Court to tax evasion and extorting an official of a Chicago auto dealership.  During that 1970 summer, six employees in the assessor’s office were being investigated for being involved in a racket to guarantee low property assessments in exchange for kickbacks.

Leaving the assessment of personal property – mostly illiquid assets – to career bureaucrats has historically led to corruption.  In a lot of ways, a wealth tax would be similar to Illinois’ business property tax, only at a much grander scale with exponentially more incentives for corruption and much larger kickbacks.

Wealth is the total value of all of an individual’s personal assets. Personal assets include bank deposits, real estate, assets in insurance and pension plans, ownership of businesses, financial securities, personal trusts and much more.

Due to its complexity, wealth is very difficult to assess. For that reason, a wealth tax would provide ample room for politicians and lifelong bureaucrats to generate large sums of money for themselves in exchange for lowering asset valuations for those looking to reduce their tax burden.

Asset valuations not only open the door for corruption, but a host of greater complications, especially when assets include one-of-a-kind luxury goods, such as art pieces, that many elites own.

Take philanthropist Kenneth Griffin, for example.  Mr. Griffin is the founder and CEO of Citadel, one of the most respected and successful investment firms in the world.  He bought a Jasper Johns painting in 2006 for US$80 million. Under the Sanders’ wealth tax, Mr. Griffin’s wealth tax liability would include the current market value of that painting. 

Estimating the painting’s current market value would be a difficult task without putting the asset on the market to learn what potential buyers would be willing to pay for it. This is because an asset worth US$80 million in 2006 may not necessarily appreciate over time. It could very well be that today, this painting is worth a lot less than what Mr. Griffin had paid for it back in 2006. According to New York based art dealer Augusto Arbizo “an artist’s exhibition history, sales history (if any), career level, and size of artwork is often used to estimate the value of artwork”. However, ultimately, an asset is only worth what the highest bidder is willing to pay for it.

While it is much easier to assess the value of real estate by comparing it to the selling price of identical homes, it is nearly impossible to assess the value of a one-of-a-kind painting without actually selling it to the highest bidder. It is very unlikely that tax authorities would be able to accurately assess the value of these illiquid assets, resulting in unfair assessments.

Sanders’ wealth tax proposals would push federal rates on some multimillionaires and billionaires to over 100 per cent. Research shows that unfair confiscatory taxes lead to more tax evasion. This is especially true when taxpayers feel that the government is not efficiently spending resources financed by the tax levy.

When Higher Taxes And Increased Complexity Deter Compliance, The Cost Of Enforcement Increases.

Tax bills far beyond an individual’s ability to pay would likely lead to under-reporting of wealth and under-payment of taxes: the tax gap.  The exacerbation of the tax gap would serve to increase the cost of enforcing the tax.

One of the many reasons wealth taxes fail is because of much higher tax avoidance and tax evasion than anticipated. While Sanders hasn’t estimated the impact of avoidance on potential revenues, former presidential candidate Elizabeth Warren – who had a similar wealth tax proposal – estimated 15 per cent avoidance. Her team had estimated that the super-wealthy already tend to understate their wealth to avoid taxes by roughly 15 per cent, but as numerous economists pointed out, the rate of tax avoidance would be much higher since tax avoidance is an increasing function of the tax rate. This means that at higher tax rates, tax avoidance would also increase.

A report published by the US tax authority, the Internal Revenue Service (IRS), admits “the most serious problem facing taxpayers is the complexity of the Internal Revenue Code”,   Compliance costs are not only huge in absolute terms but also relative to the amount of tax revenue collected.

The non-partisan Tax Foundation estimated the economic cost of tax compliance added up to roughly US$409 billion in foregone economic activity in 2016 alone. In addition, the federal government already spends roughly US$5 billion every year to enforce the existing tax code.

By raising the cost of compliance, a wealth tax would lead to less compliance and make tax enforcement even more difficult. The likely IRS response would be to increase spending on compliance programs. The combination of increased avoidance and evasion, enforcement costs and decreased economic activity would likely wipe out much of the anticipated revenue from the wealth tax.

A Wealth Tax Would Reduce Investment And Harm Economic Growth

Instead, US politicians should simplify the current tax code.

By punishing savings that finance new investments, a wealth tax would limit growth in the capital stock, harming workers and the US economy at large. Instead, US politicians should aim to fix our already too complex tax code and save the billions that compliance costs take from the economy.

There are simpler, more efficient ways to finance government. America can learn from the mistakes of European countries that have tried implementing wealth taxes. Instead of pursuing means to raise additional revenues for trillions of dollars’ worth of extravagant new spending, simplifying the current income tax code and closing various loopholes would go a long way to raise more revenue and reduce income inequality without harming American workers or national security.

Dr Orphe Divounguy
Orphe Divounguy is a Senior Economist at Zillow Group Inc. Divounguy is the former Chief Economist at the Illinois Policy Institute. Divounguy is also the founder of the Quantitative Research Group and the co-host of the Everyday Economics podcast. Divounguy’s columns and articles cover fiscal policy, labor economics, and quantitative methods for programme and policy evaluation. Contact: orphe@policyquants.com. The views presented here do not necessarily reflect the views of his employers.