A Wealth Tax Will Curb Investment, Jeopardize Taxpayer Privacy
(Elizabeth Frantz/Pool via AP)
A Wealth Tax Will Curb Investment, Jeopardize Taxpayer Privacy
(Elizabeth Frantz/Pool via AP)
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With tax filing season now comfortably in the rearview mirror, many Americans have put tax policy to the back of their minds until next April. Unfortunately, this is not the case for the many central planners in Washington. One particular tax proposal that will not go away is that of a wealth tax. Populists have renewed the drumbeat to levy taxes based on an individual’s net worth, regardless of whether those assets or gains are realized or not. Such a proposal would hinder economic growth and needlessly expand the power of the federal government.

The proposal is getting special traction from public figures and celebrities in light of the World Economic Forum in Davos this week. Comedian Trevor Noah even recently dedicated a small segment of his show to trying to demonstrate the supposed absurdity of not having a wealth tax. Noah cited billionaire Elon Musk putting up his Tesla stock as collateral for his Twitter purchase as an example, saying, “If you have billions in shares, you can use that money to get more money, but not get taxed because you ‘don’t have money?’”

While the bit garnered laughs from the audience, it actually demonstrated quite the opposite point. A wealth tax would be absurd. Thinking about it in different terms makes this fact easier to understand. If a man buys a Ford Mustang for $100,000, this purchase does not mean the man has just made $100,000. He’s simply purchased something. A car, like a nice Mustang, can certainly be used as collateral for a bank loan in the future, but that does not mean that car is liquid cash in any way, shape, or form. However, just like anything else, when the car gets sold, the man will be taxed on what he makes from the sale.

A wealth tax would be just as foolish as taxing that man on the worth of his Mustang every single year he owns it. In such a world, very few would buy cars anymore. Given the repeated tax burden for a potentially depreciating asset, there’s little upside.

Now consider that same consequence when applied to the stock market. A wealth tax means it would no longer be worthwhile for many to invest in the economy. People invest with the hopes of making money on that investment and accept they will have to pay a percentage on gains once it’s sold off. However, with repeated taxes in the interim just for holding the stock, many investments cease making financial sense. As a result, many startup companies will end up losing access to capital at a critical time. A wealth tax will end up punishing small businesses more so than the super wealthy.

Another often-unexamined angle of the wealth tax is the work burden it will place on the Internal Revenue Service (IRS). By the most generous estimates, the IRS is months behind in responding to existing tax filings. Recent reports estimate they have a backlog of several million unprocessed tax returns. This is under the current tax regime. A wealth tax would add exponential complication on top of the existing backlog.

In order to properly audit and determine liability, the IRS would need a quasi-army of employees to track the unrealized gains and the held assets of every American. This would necessitate billions of dollars in new funding. It also opens the door to a number of privacy violations, given the variety of information to which the agency would need access. Compounding this problem is the fact that the IRS routinely fails inspections when it comes to their handling of private data.

The IRS has, time and time again, proven itself incapable of properly handling the workload with which it’s presently been entrusted. They’ve also shown to be inadequate with the care of sensitive taxpayer information. A wealth tax would add vastly more work and increase the breadth and sensitivity of information they’re required to handle. This is playing to their weaknesses and is asking for a major breach.

The economy has taken a beating lately and – given recent inflationary trends – does not seem to be getting a break any time soon. Policymakers should be focusing on how to alleviate those pains. A wealth tax would go after the people who take risks and invest their money in our companies and our jobs. This approach would never be helpful, but is especially harmful at a time like this.

Daniel Savickas is Government Affairs Manager for Taxpayers Protection Alliance. 

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