A federal wealth tax would only make it harder for people with big dreams to make them a reality.
ProPublica’s “blockbuster” story showing that the wealthy “pay income taxes that are only a tiny fraction of the hundreds of millions, if not billions, their fortunes grow each year,” looks at first like a stunning revelation. But the whole tempest plops into a teapot once you ask yourself: How much of the total growth in the value of my home, retirement funds and business did I pay federal income taxes on last year? The answer is none. Nobody pays federal wealth taxes in America, but ProPublica and its Democratic allies are using stolen tax returns to try to change that.
ProPublica’s report claiming the wealthiest 25 people only pay 3.4% in income taxes contradicts publicly available Internal Revenue Service data on the top 400 income earners showing that they paid on average 32% of their income in federal income taxes, including Social Security and Medicare taxes. That same data show that the very top earners pay an effective income-tax rate of 40.1%. The rate is lower for the top 400 taxpayers because each of these individuals is a unique case in terms of how they earn income and how much they give away.
The stolen IRS data provide the story with voyeur appeal, but it turns out to be a bait-and-switch. ProPublica substitutes a magazine’s estimate of wealth appreciation, which never appears on the stolen tax returns, to falsify income. Using this deception the site calculates its “true tax rate.” ProPublica laments that taxpayers are acting “perfectly legally” in not paying a federal wealth tax, which doesn’t exist.
That wealth is taxed only when converted into income or on death may be an outrage to those in government who want to spend that wealth, but it is a purposeful, enlightened policy that lets wealth work as the nation’s seed corn, making America the richest nation in the history of the world. That wealth in turn makes it possible for the government today to provide $45,000 a year in transfer payments to the average household in the bottom 20% of American earners.
ProPublica highlights Warren Buffett, and they could have picked no better example of how this nation became wealthy. Famous for being the world’s greatest investor—and for living relatively modestly—he uses McDonald’s coupons, works in a cheap office, drives a junker and lives in a house far smaller than what he could afford. No one ever seems to ask: If Mr. Buffett isn’t benefiting from all his wealth, who is? It is at this point in the story that greed causes ProPublica and the Democrats to put their own political aspirations above the public interest.
Mr. Buffett has no vast vault of gold where he takes a daily swim like Scrooge McDuck. Instead his billions are invested to make it possible for people with good ideas and big dreams to make them a reality. Tools are bought, jobs are created, new products and services are provided, and lives are transformed.
When Mr. Buffett’s investments generate economic activity, the taxman takes slices in sales, payroll, income and property taxes. When he dies, the death tax will take 40% of his life’s work and, in doing so, will make Americans who will never know his name poorer. While it isn’t even clear government would get more by seizing Mr. Buffett’s wealth than it gets by taxing all the economic activity his snowballing investments create, how can anyone believe that the American people would benefit from stopping Mr. Buffett’s wealth from working for the economy so that government can spend it? The pressure of political correctness may induce Mr. Buffett to say he should pay more taxes, but in reality America, not Mr. Buffett, would pay those taxes in reduced opportunity and lower wages.
The miracle of our capitalist system is that it permits total strangers—as owners of wealth, possessors of productive ideas and willing workers—to come together and work for one another’s benefit and for the nation’s common good. Rich people become and stay rich by putting their savings and talents to productive use. Bill Gates reportedly owns only 7% of Microsoft ; American pension funds and mutual funds own most of the rest. Microsoft employs 101,000 people in the U.S. You may not like how rich Mr. Gates is, but as he enriched himself, he enriched all of us as workers, consumers and retirees. Was that a good deal?
Taxing wealth accumulation will mean less wealth accumulation, lower productivity growth, lower wages and a less prosperous America. If you had to pay a federal property tax on the appreciation of your home and the growth in the value of your retirement assets, farm and business every year, how could you or America ever get ahead? Private investment has created $32 trillion of equity wealth in America. “Public investment” has created $21 trillion of public debt.
Proponents of a federal property tax on wealth offer guarantees and protections that they will only tax the superrich like Mr. Buffett, promising not to touch your retirement plan, home, farm or business. But the federal income tax started out only taxing the superrich like John D. Rockefeller. The same politicians who promise to protect you from the federal wealth tax voted to impose income taxes on “wealthy” Social Security retirees with an annual incomes above $25,000. And these are the same politicians who are proposing to tax your businesses and farms at 43.4% when you die, before they take another 40% in death taxes.
Mr. Gramm is a former chairman of the Senate Banking Committee and a visiting scholar at American Enterprise Institute. Mr. Solon is a partner of U.S. Policy Metrics.