Democratic presidential hopeful Elizabeth Warren has outlined an idea for a new tax plan that would target wealthy Americans, specifically those with a net worth of fifty million or more. Warren’s recently created plan would tax the top 75,000 households in America at an annual rate of 2% on every dollar of their net worth over fifty million. Our tax attorneys in San Francisco have learned that this figure would rise 1% for every dollar over one billion, making the tax rate 3% for such households.
The Massachusetts Senator stated the revenue would be used to rebuild the middle class, by actions such as relieving student debt and helping families pay for child care. This tax proposal highlights the prospective candidate’s populist message. Warren frequently refers to the “shrinking middle class,” a topic on which she has written extensively, and blames large corporations for income inequality.
However, according to Steve Wamhoff, Director of Federal Tax Policy at the Institute of Taxation and Economic Policy, raising taxes for such households does not have as big of an impact on income inequality as one might think.
Additionally, new research shows that raising marginal income rates would not lessen income inequality very much either, due to the fact that most of the richest Americans get the majority of their wealth from private business profit, which is taxed at a lesser rate. Additionally, taxes do not have to be paid on appreciated assets until they are sold. Wamhoff stated that those who believe income inequality is a problem should begin to “think outside the box” and reach beyond ideas that have already been discussed or tried in the past.
Critics of Warren’s plan claim that the ultra-wealthy tax would be quite difficult to implement, as it would require the IRS or individual taxpayers to calculate the worth of their assets on an annual basis, including investments in private businesses and real estate, both of which are notoriously challenging to value. A spokesperson for the Tax Foundation said that the value of large, privately held companies can change almost daily, and that these fluctuations would make it almost impossible for taxpayers to know whether or not they are in compliance with the set-percentage increase.
Those opposing Warren’s proposal, such as members of Americans For Tax Reform–an anti-tax group–argue that Warren’s plan would ultimately failed to raise as much revenue as the senator projects, and would also harm economic growth and be an incentive for wealthy Americans to invest their money offshore. Warren’s proposal is also likely to face challenges on its constitutionality.
High-net worth taxpayers are currently taxed and audited at significantly higher rates than all other income groups: approximately 14.5% of returns reporting $10 million or more in income were audited by the IRS in 2017, which is almost double the auditing rate for all other income brackets. Of course, it is possible that taxpayers may substantially reduce their reported income through a combination of tax avoidance and tax evasion, but such activity is frequently caught during audits.
Increasing wealth taxes and marginal rates, and finding additional ways to tax rich Americans will probably play a vital role in most tax plans introduced by Democratic presidential hopeful’s in the coming weeks. Greg Leiserson, Senior Economics and Director of Tax Policy at the Washington Center for Equitable Growth said that it is merely a question of which plans and ideas will resonate most with Democratic voters.
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