The Case For A Wealth Tax

Summary: A progressive wealth tax applied to the top one percent wealthiest citizens is proposed that is superior to the “Fiscal Cliff” rate increase for high earners. A wealth tax decreases the rich-poor gap, is less burdensome on job creating small businesses, is a fair and simple way to raise deficit reduction revenues, and is in the nation’s long-term best interest.

Political rhetoric about creating jobs and fair taxes has focused on tweaking tax rates and deductions that do not address root causes or long-term solutions to our problems. For example, the Fiscal Cliff issue of increasing the tax rates on top earners raises $60 – $80 billion per year, $600 – $800 billion over ten years, but this amount is less than ten percent of the annual deficits, and the concerns of the “99%” about the wealthy not pay their fare share and the rich-to-poor wealth gap will still exist. Effective taxation requires out-of–the-box thinking based on principles such as (1) fairness, (2) simplicity, (3) stability, (4) investment in the U.S., and (5) minimal political manipulation.

Most wealthy individuals have accumulated their wealth through business growth, not salary or capital gains income. For example, Mr. Warren Buffet who is worth $44 billion proposed increasing income taxes for “millionaires and billionaires” that he and many others likely will not have to pay. Mr. Buffet’s wealth is accumulated through growth of his company, Berkshire Hathaway, Inc. He‘s personal income from wages and capital gains is modest since he takes a small salary, and Berkshire Hathaway, Inc. pays his business expenses such as travel and does not pay dividends. Mr. Buffet can sell some of his stocks taxed at the lower (15%) capital gains rate anytime he needs more cash. Mr. Buffet’s increasing wealth is primarily tied to Berkshire Hathaway, Inc. stock’s increasing value, and not to income from wages or capital gains.

A wealth tax, utilized in some other countries, is a way to have the wealthy, like Mr. Buffet, pay their fare share. For example, a 2% wealth tax based on Mr. Buffet’s wealth would be $880 million per year. A progressive tax from 0% to at least 2% applied to the top one percent wealthiest citizens will raise billions of dollars. U.S. private wealth is estimated at $50 trillion with 35% of it ($17.5T) being owned by the top one percent wealthiest citizens. Wealth taxes revenues would be $175 billion annually assuming a 1% average tax. This is more than double the revenue the new higher rates will provide.

A wealth tax on the wealthiest one percent tax is fair. The wealthy have sufficient resources to own a wide range of risk-return and inflation protection investments that are too risky or costly for the less wealthy. Higher risk investments yield higher returns, and precious commodities (gold, art, etc.) hedge against inflation. Thus, the rich get richer because their returns on investments are greater than those of us who have modest or no excess funds for investments. A simple wealth tax helps level the risk-return, and inflation protection playing field.

This wealth tax will diminish political manipulation, inflation ratcheting, and tax uncertainties since the tax applies to one percent of the population and their net worth rather than specific dollar amounts subject to inflation and other factors. Specious arguments that a wealth tax will hurt the economy are trumped by looking at recent history. The gap between the rich and poor that is widening will be reduced. The wealthy will likely increase their higher risk-returns investments resulting in significant contributors to job and economic growth.

Our government “leaders” created our fiscal crises and now will tweak existing laws to benefit their self-serving political agendas. Out-of-the-box solutions such as a wealth tax that are based on the principles of fairness, simplicity, stability, and the nation’s best long-term interest, not the benefit of career politicians, are long overdue. New thinking may be the only way to avoid a fiscal abyss caused by ever increasing debt.

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Dr. Cleland’s Ph.D. is from Purdue University where he specialized in complex systems theory. His technical training and experiences includes analyses of many types of systems, involvement with numerous federal, state, and local agencies, and management of a broad set of set of professionals, services, and trades people. He has managed scientists, engineers, policemen, firefighters, environment, health, safety and emergency planning experts, building trades and maintenance crafts personnel, and others.

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February 2013
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