Wealth Tax – dodging a bullet

George Rebane

One of the very dumbest things progressive Democrats have recently proposed is a wealth tax on appreciated but unrealized assets.  Everywhere it has been tried by the Left, it has not worked; it has instead reduced government revenues and distorted economies – e.g. Sweden, Germany, and France were posterchildren of such fiscal idiocies. (more here) Today our Democrats, always looking for something to screw up our economy, have attempted to import yet another bad idea as a ‘pay-for’ for their latest lavish vote buying plans.  Hopefully, this tax has been excised from the current version of this double dummy ‘human infrastructure’ bill.

As a student of economics, over the years it has become clear to me that one of the paramount qualifications for becoming a leftwing economist is that you have to be totally ignorant of human nature, especially of their economic behavior.  We won’t even attempt to plumb the depths of intellectual depravity in the Democrats’ assertion that their multi-trillion dollar spending initiatives will be absolutely free – “It will cost zero.”  The real tragedy for the country is that half of Americans accepted this Big Lie, and that the Republicans gave their usual lame response to repudiate it.

My own noodling on the wealth tax involved a niggling thought that the proposed wealth tax rates were not real, that they in effect had to be higher.  So I pushed a few squigglies, and sure enough, the real wealth tax rate is considerably higher than the rates publicized by the Democrats.  It’s a bit amazing that no Republican or even the conservative financial experts have picked up on this additional attribute of the stupid tax.  So here’s the drill as to how this tax will work on, say, an appreciated security you own.

Your nominal wealth tax amount is the wealth tax rate applied to the appreciated amount (since last wealth tax paid).  However, the rub comes when you consider where to get the money to pay the wealth tax.  The correct answer is that investments pay their own taxes, whether capital gains, added assessments, or the wealth tax.  So now you must sell a fraction of your shares, pay the applicable capital gains tax on their appreciation, and then use the remainder to pay your wealth tax.  In short, it’s the value of the fraction of shares you must sell that is your real and effective wealth tax rate.  A little algebra using the appropriate tax and appreciation rates will let us derive that formula and do the calculations.  I share the results of this analysis with you in the spreadsheet figure below (click on it to enlarge).

In the figure the blue numbers are input to create a wealth tax scenario at the indicated values, with the nominal wealth tax rate of 1%.  From the calculations shown in the figure the actual wealth tax rate comes to 1.67%, two thirds higher than the government advertised rate.  And paying this wealth tax annually reduces the investment’s annual appreciation rate from its nominal 7% to 5.33%.  When we examine what the actual wealth tax is over a range of wealth tax rates (from 1% to 3%) and capital gains rates (from 25% to 50%), then we see in the table the increased actual rates that go from 1.33% (a third higher) to 6% (doubled!).  These are plotted in the graph.

It gets worse.  As shown in the upper right of the figure, we have a $1,000 investment currently appreciating at a nominal 7% rate for ten years, then liquidating it with a payment of 40% cap gains rate.  The net spendable amount then comes to $1,580 which yields a total ten-year return of 58.03%.  When we have the same amount with ten years of ‘1%’ wealth tax payments, we wind up with $1,381 or an appreciation of only 38.08% that amounts to a penalty of over 34% on what investors currently enjoy when paying capital gains taxes only on realized gains.  And we haven’t heard any of this from our rightwing media mavens.

Comments

[scenes]

Oh well, there's plenty of wealth taxes already.

Inflation. Property tax. 'Tangible' personal property tax. Car registration, particularly on collector cars. etc.

Of course, once the machinery for collection and enforcement is in, it'll work it's way down from the quadrillionaires (who'll simply avoid it). Just like income taxes did.

It's hard to avoid the theory that the real target will tend to be tax-deferred retirement accounts. There's too damn much money sitting there and the government's ability to hoover up money for good deeds, especially good deeds for it's special friends, is endless.

[The Estonian Fox]

George, dumbing down in math has been on-going for years. Just look at a 1930s 8th-grade algebra book.

My local school district (a good one too) dropped geometry for 8th graders a few years ago, and doesn't teach slopes until 8th grade. The school-curriculum juggernaut has passed over us, and we didn't even feel the crushing sound it made. Probably drowned out by the latest Cardi-B song.

Liberals are tenacious in wanting to save us from the putrid smell of freedom, and most Republican politicians are clueless, or in survival mode, rather than attack or improvement mode. It's not surprising that no conservative has pointed out the actual higher cost of the Democrat's plan for punishing those (few) who succeed (bigly) in America. Thanks for the real numbers.

And the trickle down of the law may eventually gather in the rest of us workers.

You should send your table to the anti-capitalist guy at the NYT. Sorry, my bad, as if there were only one anti-cap at the NYT - the anti-capitalist guy whose name begins 'Krug'. Whose name I never say.

[Mike Walker]

It seems like a perfect time for our senators and pelosi to show their own unrealized gain.

[Bill Tozer]

The Unflushable Turd

https://fb.watch/9Ur4v-9gxP/