Tax Analysts Blog

Piketty, Zuckerberg, and a Plan to Tax Wealth That Conservatives Can Support

Posted on May 6, 2014

With all the books he is selling, Thomas Piketty may soon himself become a member of the 1 percent. His Capital in the Twenty-First Century is a rare phenomenon: a serious economics treatise that has caught the interest of the non-economist reading public. Moreover, its political implications are the opposite of where economists’ single-minded emphasis on growth usually takes us. Piketty writes that wealth has grown and will continue to grow faster than national income and so the problem of already inordinately concentrated U.S. wealth will only get worse. Unlike 99.9 percent of economic analysis, Picketty’s book considers the possibility that too much wealth in the hands of too few families may lead to undesirable social upheaval. And unlike most economists, Piketty is not overly concerned about the negative effects of redistribution on competitiveness.

To reduce wealth concentration, Piketty proposes that national governments coordinate and together impose a wealth tax on their richer citizens. Besides the political opposition from the conservative right, the tax would also face the problem of being difficult to administer. Unless Congress pulled a legislative fast one—an absolute impossibility—mobile wealth would be squirreled away in anticipation of the tax by an outraged and resourceful upper class.The price of gold would quadruple.

There is a gaping loophole in our tax system that does not register in any of the official government revenue studies and therefore has been almost entirely ignored in Washington’s debate about tax reform. For most Americans, income is comprised almost entirely of wages, interest, dividends, capital gains, and income from business. But for the superrich—the 0.1 percent that have been getting so much attention in recent years—large amounts of their income come in the form of appreciated stock, which, because it is usually held until death, routinely escapes income tax. Thus, the greatest fortunes in the history of the world—think Zuckerberg, Gates and Walton—are massive accretions of income that are subject to zero or extremely low effective rates of tax. In times when the federal government’s fiscal health is heading into a death spiral, it is hard to see why the wealthiest, who often pay no income tax on unrealized gains, should not contribute more.

To address that concern, David Miller, a tax attorney at Cadwalader,Wickersham & Taft in New York, who also teaches at New York University School of Law, has proposed a progressive system of mark-to-market taxation. Also known as the "Zuckerberg tax," Miller’s plan would require all individuals and married couples with $1.6 million of adjusted gross income or $5 million of publicly traded property to mark that property to market at year-end and pay tax on the year-to-year change in value. If changes in asset values were negative, the taxpayers would generate deductible losses. In addition to bringing vast amounts of wealth that remains outside the jurisdiction of the IRS into the system, the Miller proposal would greatly simplify the law (because so many antiabuse rules designed to prevent the gaming of losses and gains would no longer be relevant to mark-to-market taxpayers) and would reduce many inefficient behaviors induced by the current tax system (most notably, the lock-in effect that forces taxpayers to hold stock far longer than they would really like).

The Zuckerberg tax would precisely target America’s superrich. So fans of the Piketty book should give it serious consideration. Of course, conservatives’ first instinct will be to shoot down this tax on sight. But I would suggest they consider the following add-on to the Zuckerberg tax that holds real promise for moving the U.S. tax system into the 21st century.

In a new paper presented at the American Enterprise Institute on April 4, Eric Toder of the Urban Institute and Alan Viard of the American Enterprise Institute have proposed, much as Miller did, taxing corporate shares on a market-to-market basis ("Major Surgery Needed: A Call for Structural Reform of the U.S. Corporate Income Tax," Apr. 2014). But they would also entirely repeal the U.S. corporate tax.

Multiple strands of simple and compelling logic underlie the Toder-Viard plan. As with the Zuckerberg tax, it reaches unrealized gains that account for so much wealth accumulation by the superrich. But it would do much more. It would hugely simplify U.S. business taxation: All U.S. corporate tax compliance costs and tax planning would disappear for big corporations. Moreover, the repeal of the corporate tax would provide U.S. corporations with an unparalleled competitive advantage. The United States would become a tax haven for corporate capital. Corporations and individuals, both foreign and domestic, would have a powerful incentive to invest in the United States. Finally, by shifting the burden of international taxation from mobile businesses to individuals, who are far less able or willing to expatriate, and taxing their worldwide income, the Toder-Viard plan in one bold, quick stroke would solve most of the problems that Congress is now grappling with in the current debate on international tax reform.

Read Comments (4)

Eugene Patrick DevanyMay 5, 2014

The conservative version of a wealth tax is an "optional" tax on net wealth.
Consider an option to pay a 2% net wealth tax (excluding $15,000 cash and
$500,000 retirement savings) combined with an 8% income tax and no payroll,
capital gains, inheritance or gift taxes. It would be a very good deal for all
but a few ultra wealthy. Instead of electing to pay a wealth tax a taxpayer
would be allowed to pay a flat 26% of gross income (and make up any shortfall
with estate taxes later).

Complementary business tax reform would be an 8% C corporation rate combined
with a 4% VAT. Tax expenditures are not needed with low rates. $2 trillion in
foreign profits would be repatriated as a result of the low rate.

The elimination of payroll taxes would also create full employment as Bill
Gates said in March at the AEI. Imagine full employment and higher take-home
pay without a penny more in taxes or spending. It is called the 2-4-8 Tax Plan
and described at TaxNetWealth.com.

edmund dantesMay 6, 2014

If the goal is "to bring vast amounts of wealth that remains outside the
jurisdiction of the IRS into the system" may I suggest that we begin taxing the
huge tax-free endowments of universities and repeal the tax exemption for muni
bond interest? That should be less controversial than a new wealth tax.

emsig beobachterMay 6, 2014

Perhaps the most efficient tax system was proposed by Jonathan Swift in
Gulliver's Travels (Part 3, Chapter 6)

"...to tax those qualities of body and mind, for which men chiefly value
themselves; the rate to be more or less, according to the degrees of excelling;
the decision whereof should be left entirely to their own breast. The highest
tax was upon men who are the greatest favourites of the other sex, and the
assessments, according to the number and nature of the favours they have
received; for which, they are allowed to be their own vouchers. Wit, valour,
and politeness, were likewise proposed to be largely taxed, and collected in
the same manner, by every person's giving his own word for the quantum of what
he possessed. But as to honour, justice, wisdom, and learning, they should not
be taxed at all; because they are qualifications of so singular a kind, that no
man will either allow them in his neighbour or value them in himself.
The women were proposed to be taxed according to their beauty and skill in
dressing, wherein they had the same privilege with the men, to be determined by
their own judgment. But constancy, chastity, good sense, and good nature, were
not rated, because they would not bear the charge of collecting.

With the advent of the Internet, these assessments would be made public. Could
raise significant revenues.

vivian darkbloomMay 7, 2014

This proposal seems to assume that there is actually a market to serve as a
pricing mechanism for all the wealth of all the "super rich". Who is going to
annually value the un-traded stock of the Koch brothers, the art collections,
real estate holdings, super yachts, etc., etc? Why should property for which
there is a public market be penalized?

Why should only the "super rich", as rather arbitrarily defined here, be
subject to this proposed regime? Because it is politically feasible for a
tyranny of the majority to pick off the few at the top of the wealth index?
James Madison would have had a problem with such an ochlocracy.

Finally, who actually benefits from the unrealized investment gains and
unconsumed wealth of the "super rich"? Surely, their investments benefit the
entire economy and forcing sales of such property to meet tax obligations does
not sound like the best system of allocating capital to investment.

A progressive consumption tax sounds like a more sensible reform.

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