Soaking the rich

Jean-Baptiste Colbert, French Finance Minister under Louis XIV, colorfully explained “that the act of taxation consists in so plucking the goose as to procure the largest quantity of feathers with the least possible amount of squealing.”

Those on the left have long advocated squeezing the rich until the pips squeak. What almost everyone can agree on, however, is that a tax system should be progressive so that those with the broadest shoulders bear the greatest burden.

There are those that would wish to tax the rich simply as a blunt instrument to reduce income and wealth inequalities. A better approach is to establish what public goods and services, and what sort of welfare state, government should provide and then set about financing it in the most efficient and equitable way possible. Before deciding how many feathers to pluck, you should see how many pillows need to be filled.

U.S. Senator Bernie Sanders has already scored one big victory in defeat. Many of the ideas he advocated in the 2016 Democratic primary – such as universal healthcare paid for through progressive taxation – have become mainstream for the 2020 edition. With more than a dozen declared candidates, including Sanders himself, the 2020 Democratic primary already resembles something of a policy laboratory. Three ideas emerging from the Democrats’ progressive wing warrant particular scrutiny: hiking tax on the inheritance, wealth and income of the super-rich.

Ahead of announcing his 2020 run, Sanders rolled out proposals to increase inheritance tax. In 2017, the Trump administration doubled to $11m the threshold above which estates are subject to tax rates ranging from 18% to 40%. Sanders’ proposal is to reduce the threshold to $3.5m, with tax rates ranging from 45% up as high as 77% for billionaires. Only the wealthiest 0.2% of estates, or 1 in 500, would attract any tax at all – less than 2,000 households per year. This would raise $2.2 trillion over 10 years. The big advantages of inheritance tax in policy terms is that death cannot be avoided, while it is administratively simpler than a recurrent wealth tax because the liability only needs to be calculated once. On the other hand, the rich have developed ingenious inheritance tax minimization strategies over the years –to be effective, these loopholes must be closed.

The rich are different than you and me. What really makes them rich is their assets, not their income. Although some countries, like Norway and Switzerland, still impose wealth taxes, they have been going out of fashion, largely because shifting assets abroad to avoid it has become so easy. Senator Elizabeth Warren, another declared Democratic primary candidate, proposed in January introducing an annual wealth tax of 2% on assets over $50m, rising to 3% for billionaires. This would hit the richest 75,000 households and bring in $2.75 trillion over 10 years. Property taxes are a form of wealth tax, levying tax on the main source of wealth of middle class households. The super-rich usually have vast portfolios of property, financial and other assets – not just the roof over their heads. As Warren said at a recent town hall meeting, all she wants to do is to ‘include the Rembrandt and the diamonds’.

Progressives’ ‘auld reliable’ is to raise taxes on higher incomes. Income taxes are harder to avoid and easier to collect, while higher marginal rates are progressive by definition. Economists will be quick to point out the main downside, which is that higher taxes on work will cause people to work less, thereby reducing the tax yield. Certainly, there are arguments for shifting taxation away from work, in general, but increasing the marginal tax paid by millionaires is not going to cause them to choose unemployment! Many of the declared Democratic candidates for President have called for reversing the Trump tax cuts on high earners, but one recently-elected young Congresswoman has gone a step further. Alexandria Ocasio-Cortez has called for a near doubling of the top income tax rate from 37% to 70% for those earning more than $10m. This is not without precedent. The rate was 69% until the early 1980’s, since when income inequality has taken off as Republican Presidents from Reagan to Trump slashed taxes for the rich.

In truth, any combination of these three approaches can be followed to make sure the rich pay their fair share. There is no reason why raising the marginal tax rate on the highest earners, increasing inheritance tax on the largest estates or expanding the scope of the property tax to include financial and other assets couldn’t work, whether in the U.S. or in Ireland.

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