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1/ We need to change how we tax the richest Americans. We right now do it ineffectively. The Warren wealth tax proposal is a big move to try to change that and make sure the best off really pay according to ability.
2/ Why are we so ineffective at taxing those at the top in the income tax? Because of two things—the “realization rule” and “step up in basis.”
3/ The very top get a lot of their income from sale of property (sometimes mixing in their labor like a founder of a company). We only tax when sold (“realized”) and if they hold until death, then basis steps up and the gain is never taxed (“step up”).
4/ As a result: folks at the very top can sit on huge gains, borrow to finance their lifestyles, and then have the gains go “poof” when they die.
5/ The Warren wealth tax would require those at the very very top to pay tax even if they aren’t selling. Apparently 2% over $50 mn and 3% over $1 bn. And it reflects a simple fact: they really do have a great ability to pay.
6/ There are challenges here. One is valuation. How do we value the property that’s not publicly traded on a regular basis? We do so in the estate tax but only at death. It’s not easy there, and has been abused. That’ll be a key area on which to work.
7/ Another is the constitutionality. Some folks will say it’s a “direct tax” that has to be apportioned according to population of states. Very good arguments for why that’s not true and should be within Congress’s power: repository.law.indiana.edu/cgi/viewconten…
8/ I’ve in the past leaned toward solutions in the “income tax” space for these reasons. And there are some fundamental reforms that could be done there addressing some of these same problems.
9/ But even with a good income tax for those at top, you might want a wealth tax. (And we don't have a good income tax!) cc @AriGlogower nyulawreview.org/issues/volume-…
10/ Bottom line: Warren proposal is addressed at a real problem of inequality and ineffective taxation at the very top, and goes big as it should. Hope this is the start of a real debate about the contours of fundamental and progressive tax reform.
