Photograph Source: Fibonacci Blue – CC BY 2.0
A long overdue tax on the wealth of the wealthy is finally being put forward as a means to fund government services and reduce economic inequality.[1] At this point, among Democrats, the Sander’s proposal goes the furthest and is estimated to raise $4.35 trillion over the next 10 years.
As of the second quarter of 2019, the wealth of the 1% was estimated by the Federal Reserve Board to be $34.72 trillion. If their wealth remains unchanged during the next ten years, using the estimate of Sander’s wealth tax coming to $4.35 trillion, their wealth will be reduced by less than 13% to $30.37 trillion.
The 1% will continue holding a substantial sum and be in a position to exercise much power.
Currently Almost Everyone Pays a Wealth Tax
Many people already pay a regressive wealth tax in the form of property taxes on what could be most of their wealth, their homes.[2]
If one is a renter, one’s landlord passes on the property tax due in the rent charged. One is essentially indirectly paying the landlord’s property tax.
For most homeowners, much of the property tax paid is not on one’s equity, but on one’s mortgage debt.
For example, if a house is purchased for $500,000 with a down payment of $100,000, one will take out a mortgage for $400,000. If the yearly property tax rate is one percent of the value of one’s house, the property tax is $5,000. This results in a tax rate of 5% on the value of one’s wealth in one’s house ($100,000.) In essence, one is paying a wealth tax of $4,000 on $400,000 of debt, the mortgage held by the bank. One may get to deduct the tax paid and reduce their income taxes, but this savings might not be much more than $1,000. It is secondary to the fact that one is paying a wealth tax on what they owe at a fairly steep rate.
The tax rate is even higher if one puts $50,000 down on the purchase of the $500,000 house. It comes to 10% on one’s ownership share. This is greater than Sander’s proposed top rate of 8% on wealth greater than $10 billion. This homeowner will be able to brag about paying a wealth tax at a rate greater than the top rate Sanders is proposing for Bezos and Gates!
According to the Federal Reserve Board, the value of the real estate owned by the poorest 50% of the U.S. population is $3.92 trillion. The size of their mortgages comes to $3.04 trillion meaning the equity in their homes is less than $1trillion. If nationwide property taxes are 1%, then they are paying about $40 billion/year in property taxes (not including the rent portion of a landlord’s property taxes paid by tenants.) This comes to a tax rate of 4% on their equity in their home.[3]
By contrast, the wealthiest 1% hold real estate valued at $4 trillion with home mortgages of $440 billion. The property tax at 1% comes to $40 billion which represents .115% of their total wealth. That means the poorest 50% pay a tax rate on their real estate wealth 34 times greater than the rate paid by the wealthiest 1% making the property tax extremely regressive.[4]
A specific example illustrates the contrast between what poorer people pay in wealth taxes compared to one of our obscenely super wealthy friends, Bill Gates. He owns a house in Washington. The assessed property value for 2018 is $131,239,000. Property taxes paid came to $1,040,644, less than 1%. His wealth in 2019 has been put at $105 billion. If his property taxes on his home is the only wealth tax he pays, his rate of taxation on his total wealth is about one-thousandth of 1% or .001% while those who are among the poorest 50% in the U.S. who own a home get to pay a rate that is four thousand times greater, and much of this tax is on money they owe, their mortgages.[5]
Sanders Wealth Tax Proposal
On Sander’s official website under the title Tax on Extreme Wealth are details about his proposal and his claim that
“Under this plan, the wealth of billionaires would be cut in half over 15 years which would substantially break up the concentration of wealth and power of this small privileged class.”[6]
Under Sander’s proposal, for a married couple, the rate of the tax rises from 1% on net worth over $32 million until it reaches the top rate of 8% on wealth over $10 billion. For a single person, the tax rate applies to the above net worth amounts cut in half.
A couple with $100 billion in wealth would pay a tax of $7.81 billion for that year while one with wealth of $50 billion would be paying $3.8 billion. Those worth
$1 billion would pay $31.7 million.
The Federal Reserve Board has provided totals in nominal dollars for the net wealth of the 1%, but not the .1%. Most, if not all, of the .1%, are the people who would be subject to Sander’s wealth tax.[7] Since 2004, the .1% have held roughly half of the wealth of the top 1%.[8]
What would have been the impact of Sander’s wealth tax had it been instituted during the last fifteen years? To calculate it, I take Sander’s top rate of 8% and treat it as a flat tax on the wealth of the .1% although the “poorer” members of this group might not have been subject to the wealth tax or are paying at a much lower rate than 8%.
A flat tax calculation is being used since there is no breakdown on the individual wealth of all members of the .1% who are subject to the tax.
I use the most recent Federal Reserve figures for the size of the wealth of the wealthiest 1% held in the first quarter of each year. I divide it in half to represent the wealthiest .1% and calculate the flat 8% tax on it. Their wealth amount is adjusted each year based on the impact of the tax and assuming their wealth would have continued to grow at the same rate.[9]
Had there been a flat tax of 8% on all of the wealth of the wealthiest .1%, the tax would have raised $7.49 trillion during the 15 years.
The above figures also clarify that with a flat tax of 8% during the last 15 years, the size of the wealth of the wealthiest .1% would have been reduced during the last 15 years in nominal dollars by 39%. It would be 70% less than what it is without the tax after the fifteenth year of 2019.
Had there been an 8% wealth tax in place, the amount of the wealth of the 1% would still be “excessively excessive,” $21.9 trillion, instead of $34.07 trillion, an amount more than it was before 2013.
These figures have to be qualified. The assumption is made that the amount of income taxes paid would have no impact on the wealth holdings of the .1%. We do not know how much of the additional tax revenue of the government would have been returned to the .1% in the form of contracts and other government expenditures that offset the impact of the wealth tax. The assumption is also made that the .1% would have been unable to find loopholes to avoid or reduce the tax. It also does not take into account the impact of the estate tax paid upon one’s death.
Using my figures, over time, the size of the wealth tax will decline. Additionally, the income generated by their lowered wealth will likely go down resulting in lower income tax revenue.
A Simple Way the Wealthy Can Reduce Their Wealth Tax
The wealthy have many tax evasion schemes.[11] One is setting up their own foundation. Contributions to it are treated as a charitable income tax deduction that reduces their income taxes. The description on Sander’s site does not include the wealth held by the foundations as being subject to the wealth tax.
One who is worth more than $10 billion and pays a top wealth tax rate of 8% can avoid the yearly 8% tax on a portion of their wealth by donating it to their own foundation. They could save up to an additional 40% of the donated amount on their federal income taxes since it would be considered a charitable donation. In this case, they could save in taxes in one year 48% of the amount donated not including the tax savings in some states that impose a state income tax. Their wealth would be secured in their foundation and not subject to the wealth tax in future years. Additionally, they could use the wealth of their foundation to shape social policy and simultaneously have the image of being a caring philanthropist.
Wealth Tax Impact on Gates and Bezos
The emphasis of Sander’s proposal is taxing billionaires. Below is a look at what would have been its impact on Bill Gates during the last 15 years.
A google search of the size of the wealth held by Gates results in inconsistent numbers. Here are the numbers I came up with and what would have been the impact of Sander’s wealth tax.
Had Bezos been subject to Sander’s wealth tax during this same period, and treated as married the whole time, (using the estimate of his wealth found in Wikipedia,) as of 2018, he would be worth $42.53 billion instead of $112 billion. That is a level of his nominal wealth greater than it was every year before 2015.
Had Sander’s wealth tax been in place during the last fifteen years, the current wealth of Gates and Bezos would be significantly less. However, both would remain fantastically wealthy and, presumably, just as influential.
People should not fret or lose sleep over the impact of Sander’s wealth tax on our fellow super-wealthy citizens like Gates and Bezos. We will still have our billionaires even though the “socialist” Sander’s has stated “I don’t think that billionaires should exist.”
Sander’s proposed wealth tax is more than a baby step in reducing inequality and having more funds available to meet peoples’ pressing needs. However, as radical as it may be viewed by some, it can justifiably be characterized as one of many other steps that need to be taken if we want to exist in a just and livable world.
Notes.
1. Discussions of inequality often focus on income inequality rather than the far greater wealth inequality. See my article on Federal Reserve income and wealth figures at https://www.counterpunch.org/2017/10/27/the-rich-in-the-u-s-just-keep-on-getting-richer-time-to-party/ ↑
2. In California, and presumably many other states, car owners pay an auto registration fee. It is partly calculated based on the value of one’s vehicle making it a wealth tax. ↑
3. Shouldn’t the holders of mortgages, a financial asset like a bond, be the ones paying the property tax instead of the homeowner? ↑
4. Sanders recognizes that the property tax is a wealth tax and indicates that it “disproportionately impacts working class families,” but does not refer to it here as an extremely regressive tax. ↑
5. Gate’s house address was found at https://en.wikipedia.org/wiki/Bill_Gates%27s_house#cite_note-2
Start: https://blue.kingcounty.com/assessor/erealproperty/default.aspx
Enter address found on Wikipedia 1835 73rd Ave NE Medina Washington google search for zip code is 98039
Scroll down to see assessed value for many years
Scroll up, Click property tax bill, then scroll down and click tax year details ↑
6. What is not clear in Sander’s wealth tax proposal is if the wealth of the superrich would be half of what it is now in 15 years, or half of what it would be in 15 years had there been no wealth tax. ↑
7.https://www.federalreserve.gov/releases/z1/dataviz/dfa/distribute/table/#quarter:118;series:Net%20worth;demographic:networth;population:all;units:levels ↑
8. http://gabriel-zucman.eu/files/SaezZucman2016QJE.pdf, https://academic.oup.com/qje/article/131/2/519/2607097 at the bottom of table 1, click Online appendix table B1 more than halfway down the downloaded file ↑
9. The calculation is done by taking their wealth one year and reducing it by the 8% tax. This amount is increased/decreased by the change from this year to the next year. This amount is then reduced further by the 8% tax. This is repeated for each year. ↑
10. The Federal Reserve numbers have changed since I wrote this article at https://www.counterpunch.org/2019/08/13/the-federal-reserve-boards-recent-figures-on-the-outrageous-unequal-distribution-of-wealth/. Those figures only went through the first quarter of 2019. The figures now show the amount of total wealth held by the top 1% as $34.07 trillion and the percent as 33.23%. The previous figures for this same quarter were $31.91 trillion and 31.1%. They also no longer show the wealth of the poorest 50% as ever being negative. It’s lowest amount is $140 million as of the second quarter of 2011. Previous figures showed it as below zero between 2010-2012. https://www.federalreserve.gov/releases/z1/dataviz/dfa/distribute/table/#quarter:118;series:Net%20worth;demographic:networth;population:all;units:levels ↑
11. See https://www.brookings.edu/wp-content/uploads/2019/09/Saez-Zucman_conference-draft.pdf ↑