WILFORD: Taxpayers Deserve Better Than Sanders’ 8 Percent ‘Wealth Tax’

Every economist knows that when you tax something, you get less of it. Of course, no one has ever accused Vermont Sen. Bernie Sanders of being an economist — so maybe that explains why he wants to tax wealth at even higher rates than Massachusetts Sen. Elizabeth Warren does.

Sanders recently introduced his proposed version of Warren’s wealth tax, featuring more brackets and higher rates. Where Warren’s plan had just three brackets, Sanders’s has nine. And where Warren’s wealth tax maxes out at 3 percent, Sanders’s goes up to a 8 eight percent.

Now, if 3 percent — or even 8 percent — tax rates don’t sound particularly high, that’s because we’re used to thinking about taxes that apply only to a certain subset of our wealth. For example, income taxes apply solely to the dollars we earn in a given year, while sales taxes apply solely to what we spend.

Wealth taxes, on the other hand, apply to all wealth, no matter what is done with it. This can lead to exceptionally high marginal rates, which bear more resemblance to the income tax rates most are familiar with. Sanders’s 8 percent wealth tax applied to an asset that grows at a rate of 8 percent annually is equivalent to a 100 percent marginal rate. Assets that appreciate slower than 8 percent annually could face marginal rates well in excess of 100 percent.

Given this, it should be unsurprising that a wealth tax would dramatically cut the wealth of those affected while representing a massive disincentive for the next generation of entrepreneurs and innovators to grow their wealth beyond a certain point. To Sanders that may well be the point, but only because he fails to understand that his crusade against wealth will substantially reduce investment in businesses. Tax policy should be structured to encourage saving and productive investments, and a wealth tax does exactly the opposite.

Yet there are other significant problems with a wealth tax, particularly one as large as that which Sanders is proposing. A wealth tax is nightmarishly difficult to administer, and those targeted by the tax have every incentive to avoid it. That’s because taxing someone’s wealth first requires establishing what to consider part of that person’s wealth, and then to assign a value to it.

The first part, deciding what to include in a taxpayer’s net worth, may sound easy, but it is anything but. Even setting aside the significant problem of preventing fraud and evasion, there would arise the difficulty of addressing common practices such as using one’s wealth to fund a charitable foundation. The architects of Sanders’s wealth tax advocate including assets in charitable foundations alongside personal resources when determining tax liabilities, meaning that someone like Bill Gates would have to pay tax on both his personal fortune and on the tens of billions of dollars he has used to endow his foundation for its charitable pursuits.

But even if auditors could untangle that Gordian knot, the problem still remains of assessing the value of a taxpayer’s assets. Doing so would require an army of compliance auditors who would be given the near-impossible task of valuing non-liquid assets, such as pieces of art or shares in non-public businesses, on an annual basis. These problems, taken together, are why other developed economies in the OECD have been steadily moving away from wealth taxes: the juice simply isn’t worth the squeeze.

Yet at the same time that Sanders promises that his wealth tax will help to cut down on wealth inequality in the country, he also says that it will be crucial to funding his multitude of costly spending proposals. Someone should let him know that funding social programs with what he himself claims will be an ever-shrinking tax base is a recipe for disaster.

Taxpayers deserve better than poorly-considered class-warfare proposals. A wealth tax would be a disaster that America can ill afford.

Andrew Wilford (@PolicyWilford) is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to fiscal policy analysis and education at all levels of government.