Tax Update 12-12-19: Wealth Tax

December 10, 2019Evergreen Q4 2019, News

Woodstock Quarterly Newsletter / Q4 2019

Worries About Wealth Taxes 

How does someone get a feel for our tax system?  In business, running your own, smaller business is probably good preparation for running a larger one.  A senior executive of a large firm who was pushed out to make way for another manager, started and ran his own firm before being hired back to run the larger firm.

“I would never be able to do the job I’m doing now without those two to three years”; there is no better way to learn the value of money than by spending your own.[1]  The Bureau of Labor Statistics Consumer Expenditure Survey for 2018 calculates that the average American “consumer unit” paid $18,617 in federal, state and local income taxes, property taxes, social security taxes and “other” taxes.  The total for what this average American consumer unit paid for food ($7,923), health care ($4,968) and apparel and services ($1,867) was $14,758, much less than the taxes total.  This same “gap” existed for every year from 2013 to 2018.[2]  We’re assessed more in taxes than we spend on food, clothing and health care.

In 1992, former senator and 1972 presidential candidate George McGovern wrote a column entitled “A politician’s dream is a businessman’s nightmare”.[3]  In it he describes what he didn’t know as a legislator about running a business.  Even with worthy goals “the concept that most often eludes legislators is: ‘Can we make consumers pay the higher prices for the increased operating costs that accompany public regulation and government reporting requirements with reams of red tape’?” Or will consumers substitute or delay purchases thereby harming the regulated industry.  He had to wait until he was in the hotel business in Connecticut, eventually facing bankruptcy, to find out this question is important.

Wealth taxes are in the news.  The discussion actually leads back to the U.S. Constitution.  According to the Tax Foundation the question is whether a wealth tax is a “direct tax”.[4]  If it is, then it is unconstitutional.  Before the US Constitution received its Sixteenth Amendment allowing an income tax, our court system had been deciding that federal direct taxes were unconstitutional because that form of taxation was reserved for the states, unless certain conditions were met.  Aren’t inheritance and estate taxes direct taxes?  Actually, as decided by our court system in 1900, they are indirect taxes on the transfer of wealth, rather than on the wealth itself.  Corporate income taxes are not direct taxes, but are excise taxes on the privilege of doing business in the corporate form.  This has an eerily familiar ring to something like “you didn’t build that”.  There appears to be great constitutional flexibility here.  However, there is real world experience to fall back on.  As one of the current presidential candidates refers to the Scandinavian experience in creating wealth taxes, mostly done in the 1970s, it is worthwhile to note that Sweden, Denmark and Finland abandoned the wealth tax in 2007 or earlier because “the tax which was designed to keep the rich from getting richer, is increasingly seen as harming primarily the not quite rich upper middle class”.[5]

If you or any of your other advisors have questions about the issues raised here, please contact your investment manager or one of us.

William H. Darling, CPA – Chairman & President
Jeanne M. FitzGerald, CPA – Tax Manager

[1] WSJ Magazine August 2019
[2] CNS News 10/2/2019
[3] WSJ 10/21/2012
[4] Tax Foundation 10/15/2019
[5] WSJ 9/26/2019