Wealth Tax vs. Capital Gains Tax Reduction

[tcmay@got.net (Timothy C. May)]

I've been thinking a lot about the prospects of a "wealth tax," or "asset
tax," in the U.S. With the stock market averages at record levels (and,
hey, Intel has gone up $6 just so far today, to an unheard of $94.5 level),
and with increasing fractions of people's overall net worth tied up in
equities, bonds, houses, property, etc., it may be that the looters will
take a more serious look at taxing people's overall wealth, e.g., the 5% of
net worth per year that some countries have.

(At the same time, there is also a chance that the tax on capital gains
will be greatly reduced or even possibly eliminated, also as some countries
such as Japan have already done.)

The conundrum is this: so long as stocks, bonds, and other holdings are not
taxable while unsold, and so long as large amounts of private pension funds
and whatnot are flowing into equities, this wealth is "unreachable" to the
government tax collectors. Further, much of this wealth is "locked" by the
high marginal tax rates on capital gains (35-40%, depending on which state
one lives in, on so-called "tax preference items," etc.) Many people will
not sell assets if they have to pay 35-40% to the tax man if they sell, but
nothing if they just sit on the asset and watch it go up in value.

(Obviously, the assets get sold eventually. But many people will choose to
simply not worry about the heavy taxes _this_ year, and delay selling 'til
some future date. They may also think the capital gains rates will go down,
or may have visions of taking their stock certificates and simply moving to
Anguilla :-}.)

If this trend continues--more money in equities and investments, and a
higher overall valuation (as prices are driven up by more folks getting in,
and by other conventional factors)--the government would seem to have two
main choices:

1. Start taxing the overall wealth, e.g., 5% per year.

2. Reduce capital gains taxes so that the "locked assets" will at least
come to market and generate some income from capital gains, even if at a
reduced level.


At 6:38 PM 9/17/96, Duncan Frissell wrote:

>Note too the recent article in the Economist about how European firms are
>raising capital in the UK and the US because it is available there in
>private pension savings while European government retirement systems suck
>loads of capital out of the system leaving nothing but massive government
>debts.

The flow of capital into equities is truly astounding. Some fraction of
Americans are really preparing themselves well for retirement, emergencies,
vacations, etc. Of course, a distressing fraction of Americans have no
savings plans to speak of, and will essentially have no money as they age.

Needless to say, I despise the idea of a "wealth tax," and I can see
various loopholes and workarounds. I'd also expect a lot of folks to simply
move out of the country if this were to happen.

In the current political climate, I'd say the chance of a wealth tax in the
next several years is small. Ditto for a capital gains tax rate reduction.
As with selling assets, "doing nothing" is often the likeliest path.

--Tim May

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