Recently, in the New York Times, I saw a letter, authored by several people, calling for a tax on the wealthy. These individuals claim to be part of the wealthiest 1 percent, and the document reiterates candidate Elizabeth Warren’s call for a “wealth tax.” Simply put, while we have a tax on income, that doesn’t necessarily mean the wealthy are paying it at the level others in the US are.
For example, if my net worth is $50 million, and the only income I have is from capital gains, the most income tax that I can pay is ~23.4 percent, not the top rate of 37 percent. Long-term capital gains are taxed at 0, 15 or 20 percent, depending on an individual's adjusted gross income (AGI). If this number is over $250,000, there is an additional 3.4 percent net investment income tax (NIIT) tacked on.
However, what exactly is a wealth tax? Even though these people are calling for one, I say a wealth tax already exists.
Here's my argument: The estate tax is a wealth tax. The limit on the amount of assets someone can have at their death before paying the tax is $11.4 million. If the person is married and selects portability, the amount rises to $22.8 million. If you exceed this threshold, you pay 40 percent in estate taxes.
Further, you are allowed to give a gift of $15,000 a year in 2019. If you are married and your spouse agrees to gift-splitting, you can give one person $30,000 a year. If you exceed these yearly amounts, you have to file a gift tax return. With a gift tax, you have a lifetime exclusion up to the estate tax limitations. If you exceed that amount, a gift tax of 40 percent is due.
So, if the wealthy really want to pay a wealth tax, then the whole estate planning industry shouldn’t exist anymore. I mean, why try to avoid a tax that you claim to be all for?
According to IRS statistics, the wealthiest 2 percent of all income earners pay 90 percent of all income tax. Therefore, logically, any tax cut that is made would benefit those who pay the taxes. You can’t reduce the taxes of a taxpayer who doesn’t pay income tax. You can give entitlements like the earned income tax credit (EITC), refundable credit for college tuition, child tax credits and other credits and deductions that phase out for higher income earners.
The letter goes on to say what can be done with the addition of a wealth tax, but in reality, the 1 percent can already implement solutions to the problems they see in the letter. They can form foundations, charities, etc. I realize this opens a bigger question about whether it is the government’s responsibility to do certain things for its citizens, but that is not the crux of this blog post.
Sure, a wealth tax sounds good, but my point is, it already exists.