Tax Richie Rich!
By Gary Silverman, CFP®
Last week we started looking at the meaning of “fair” taxation. Splitting the tax burden evenly by dollars is, in this guy’s opinion, pretty unfair. After all, having a $50,000 income family pay the exact same tax as a family earning $450,000 only seems fair to the latter family.
So, we looked at a flat tax where everyone pays the same percentage. There we saw that while it was fair mathematically, when you looked at the effects on a family’s lifestyle, it was definitely not fair. The richer family might have to downsize their vacation; the lower-income family might have to downsize medical care and education.
That’s pretty much what has led to the current tax system where there is a base amount that is not taxed (the standard deduction), and a graduated scale where the higher your income the higher percentage you pay. Of course, the impact is corrupted by all of the incentives and disincentives added to the tax law by our legislators—but that’s a discussion for another day.
Today I want to look at a little something behind the scenario we used last week. We compared a family earning $50,000 to one earning $450,000. I did that because our taxes are mostly based in income. But what about wealth? What if I told you that the family earning $50,000 did so on a $50,000,000 bank account earning 0.1% interest? Oh, and what if they also had a municipal bond portfolio worth another $50 million that spit out $1.5 million of non-taxable interest last year?
Let me do the math for you. The “lower-income” family was really just a lower taxable income family. Their true income was $1.55 million, and they have $100 million in investments. So, now is it “fair” for a flat tax or a graduated tax on income? The lifestyle shift is turned upside down and magnified.
Which brings us to Elizabeth Warren. While I’m not a fan, I respect her for being the only presidential candidate to actually outline how they would do tax and spending—which seems to have ended her White House bid. In it she mentioned the idea of taxing based not just on income, but also on wealth. While her ideas had a lot of problems with it, the base idea of taxing wealth isn’t any more ludicrous than taxing income. It’s certainly no less fair.
Since fair is a matter of opinion and not just mathematics, you’ll have to be the judge. Personally, I’m open to it, but there’s a lot they’d have to get right. And given that it’s Congress that would be doing this, that’s where my doubts start. As they say, the Devil is in the details. While Warren has reintroduced the idea in Congress, I’m guessing that a wealth tax is maybe two or three presidents from now at the earliest.
Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing.