https://conversableeconomist.blogspot.com/2020/11/the-super-rich-and-how-to-tax-them.html
How might one define the super-rich and how might the government tax them? Florian Scheuer tackles these questions in "Taxing the superrich: Challenges of a fair tax system" (UBS Center Public Paper #9, November 2020). Also available at the the website is a one-hour video webinar by Scheuer on the subject. Those who want a more detailed technical overview might turn to the article by Scheuer and Joel Slemrod, Taxation and the Superrich," in the 2020 Annual Review of Economics (vol. 12, pp. 189-211, subscription required).
When discussing the superrich in a US context, there are two common starting points. One is to focus on the Forbes 400, an annual list of the 400 wealthiest Americans. Another is to focus on the very top of the income distribution--that is, not just the top 1%. but the top 0.1% or even the top 0.01%.
On the subject of the Forbes 400, Scheuer writes: "The cutoff to make it into the Forbes 400 in 2018 was a net worth of $2.1 billion, and the average wealth in this group was $7.2 billion. The share of aggregate U.S. wealth owned by the Forbes 400 has increased from less than 1% in 1982 to more than 3% in 2018." It's worth pausing over that number for a moment: the share of total US wealth held by the top 400 has tripled since 1982. Scheuer also points out that one can distinguish whether those in top 400 inherited their wealth or accumulated it themselves. Back in 1982, 44% of the top 400 had accumulate it themselves, while in 2018, 69% had done so.
Of course, wealth is not the same as income. For example, when the value of your home rises, you have greater wealth, even if your annual income hasn't changed. Similarly, when the price of stock in Amazon or Microsoft changes, so does the wealth of Jeff Bezos and Bill Gates (#1 and #2 on the Forbes wealth list), even if their annual income is unchanged.
The IRS used to (up to 2014) release data on the "Fortunate 400" top income-earners in a given year; in 2014, the cutoff for making this list was $124 million in income for that year. Another approach is to looking at the top of income distribution. the top 0.01% represents the 12,000 or so households with the highest income in the previous year.
There are basically four ways to tax the super-rich: income tax, capital gains taxes, the estate tax, or a wealth tax.
In the 2020 tax code, the top income tax bracket is 37%: for example, if you are married filing jointly, you pay a tax rate of 37% on income above $622,500. (This is oversimplified, because there are phase-outs of various tax provisions and surtaxes on investment income that can lead to a marginal tax rate that is a few percentage points higher.) But one obvious possibility for taxing the superrich would be to add additional higher tax brackets that kicks in a higher income levels, like $1 million or $10 million in annual income.
The difficulty with this straightforward approach is what Scheuer refers to as the "plasticity" of income, that is, "the ease with which higher-taxed income can be converted into lower-taxed income." Scheuer writes:
Plasticity is an issue when different kinds of income are subject to different effective tax rates. By far the most important aspect of plasticity, with implications both for understanding the effective tax burden on the superrich and for measuring the extent of their income and therefore income inequality, concerns capital gains.
To put this in concrete terms, if you look at the wealthiest Americans like Jeff Bezos or Bill Gates, their wealth doesn't rise over time because they save a lot out of the high wages they are paid each year; instead, it's because the stock price of Amazon or Microsoft rises. They only pay tax on that gain if they sell stock, and receive a capital gain at that time. Thus, if you want to tax the super-rich, taxing their annual income will miss the point. You need to think about how to tax the accumulation of their wealth
In the US, taxes on capital gains have several advantages over regular income. The tax rate on capital gains is 20%, instead of the 37% (plus add-ons) top income tax rate. In addition, you can let a capital gain build up for years or decades before you realize the gain and owe the tax; thus, along with the lower tax rate there is a benefit from being able to defer the tax. Finally, if someone who has experienced a capital gain over time dies, and then leaves that asset to their heirs, the capital gain for that asset during their lifetime is not taxed at all. Instead, the heir who receives the asset can "step up": the basis, meaning that the value for purposes of calculating a capital gain for the heir starts from the value at the time the asset was received by the heir. Taken together, the "plasticity" of being able to gain wealth by a capital gain, rather than by annual income, is a core problem of taxing the superrich. Scheuer explains:
Most countries' tax systems treat capital gains favorably relative to ordinary labor income (Switzerland being an extreme case where most capital gains are untaxed). Realized capital gains represent a very high fraction of the reported income of the superrich. For example, realized capital gains represented 60% of total gross income for the 400 highest-income Americans in tax year 2014. ... For tax year 2016, those earning more than $10 million report net capital gains corresponding to 46% of their total income, whereas capital gains are a negligible fraction of income for those earning less than $200 k.There are other ways to tax capital gains. For example, one of Joe Biden's campaign promised was to tax capital gains income at the same rate as personal income for anyone receiving more than $1 million in income in that year. Before getting into some of the reasons, it's worth noting that every high-income country taxes capital gains at a lower rate. Scheuer writes:
Five OECD countries levy no tax on shareholders based on capital gains (Switzerland being a prominent example). Of those that do, all tax is on realization rather than on accrual. Five more countries apply no tax after the end of a holding period test, while four others apply a more favorable rate afterwards. The tax rate varies widely with the highest as of 2016 being Finland, at 34%. With a few exceptions, the accrued gains on assets in a decedent's estate escape income taxation entirely, because the heir can treat the basis for tax purposes as the value upon inheritance.
Why is capital gains taxed at a lower rate, all around the world? Why is it taxed only when those gains are realized, perhaps after years or decades, rather than taxed as the gains happen? One reason is that there is an annual corporate tax, so income earned by the corporation is already being taxed. Or if the capital gain is being realized on a gain in property values, there were also property taxes paid over time. In general, many countries want to have a substantial share of patient investors, who are willing to hold assets for a sustained time. Trying to tax capital gains as they happen, rather than when they are realized, would also raise practical questions--for example it might require people to sell some of their assets to pay their annual taxes.
Scheuer runs through a variety of different ways of ways of taxing capital gains, and you can consider the alternatives. But again, there are reasons why no country has pursued taxing capital gains as they accrue, rather than as they are realized, and why no country taxes such gains as ordinary income--and in fact why some countries don't tax them at all.
Another alternative is to tax wealth directly. I've written about a wealth tax before, and don't have a lot to add here. Scheuer offers the reminder that Donald Trump was an advocate of a large but one-time wealth tax on high net-worth individuals back in 1999, when he ran for president on the Reform Party ticket, as a way to pay off the national debt. Here, I'll just offer a reminder that a wealth tax is based on total wealth, not on gains. Thus, if there is a an annual wealth tax of, say, 3%, then if your wealth was earning a return of 3% per year, the wealth tax means you are now earning a return of zero. If there is a year where the stock market drops, and the returns for that year are negative, you still owe the wealth tax.
About 30 years ago, 12 high-income counties had wealth taxes, but the total is now down to three. The general consensus was that the troubles of trying to value wealth each year for tax purposes (and just consider for a moment how the superrich might shuffle their assets into other forms to avoid such a tax), just wasn't worth the relatively modest total amounts being collected. The one country that continues to collect a substantial amount through its wealth tax is Switzerland--but remember, Switzerland doesn't have any tax at all on capital gains. Scheuer writes:
So far, the Swiss case is the only modern example for a wealth tax in an OECD country that has been able to generate sizeable and stable revenues in the long run. It enjoys broad support, as evidenced by the fact that it keeps being reaffirmed by citizens in Switzerland's direct democracy, where most tax decisions must be put directly to voters. However, its design and the role it plays in the overall tax system are quite different from current proposals in the United States. In particular, it is not geared towards a major redistribution of wealth, and indeed wealth concentration in Switzerland remains high in international comparison.
A final option, which is not a focus of Scheuer's discussion, would be to resuscitate the estate tax: that is, instead of taxing the superrich during their lives, tax the accumulated value of their assets at death. For an example of a proposal along these lines, William G. Gale, Christopher Pulliam, John Sabelhaus, and Isabel V. Sawhill offer a short report of "Taxing wealth transfers through an expanded estate tax" (Brookings Institution, August 4, 2020). They point out, for example, that back in 2001 estates of more than $675,000 were subject to the estate tax; now, it applies only to estates above $11.5 million. Maybe $675,000 was on the low side, but an exemption of $11.5 million is pretty high--only about 0,2% of estates are subject to the estate tax at all. They calculate that rolling back the estate tax rules to 2004--which was hardly a time of confiscatory taxation--could raise about $100 billion per year in revenue.
Taking all this together, it seems to me that a middle-of-the-road answer on how to raise taxes on the superrich would focus in part on the estate tax, and in part on the capital gains tax--and perhaps in particular on limiting the ability to pass wealth between generations in a way that avoids capital gains taxes.
-- via my feedly newsfeed
NEW DELHI – Once US President-elect Joe Biden's administration has made the relatively easy decisions to rejoin the Paris climate agreement, remain in the World Health Organization, and attempt to reboot the World Trade Organization, it will confront three key foreign-policy issues. In order of importance, they are China, China, and China.
Why Biden Can Overcome Political Gridlock
Biden's dilemma is that China has become too deviant to cooperate with fully, too big to contain or ignore, and too connected to decouple from. So, what principles should govern America's economic engagement with it?
Two decades ago, the United States and the rest of the world bet that China, as it became richer, would open up economically and politically, while remaining benign in its international conduct. Under the resulting implicit contract, embodied in China's 2001 WTO accession agreement, the world promised to guarantee market access for Chinese exports; in return, China would make its economy more open and transparent, and play by international rules.
But China has changed since then, and not only by becoming much richer and a much larger trader. Under President Xi Jinping, an authoritarian in the mold of Mao Zedong, China has repudiated Deng Xiaoping's three guiding tenets: collective leadership in domestic politics, steady economic opening and reliance on market forces, and quiet cooperation with the world. Instead, Xi's repressive regime is fashioning a new brand of inward-oriented, state-dominated capitalism. And it poses a threat to many of its neighbors, including Taiwan, Australia, India, the Philippines, Vietnam, and Japan.
In other words, the world has lost its China wager. Even where China has adhered to the letter of the contract – concerning currency and intellectual-property, for example – it has violated the spirit. The Biden administration and the rest of the world are thus entitled to renegotiate the deal.
America and others have no right to obstruct China's economic rise, because its 1.4 billion citizens are entitled to pursue prosperity and security. Likewise, China is entitled to choose its development model, with its own balance between the state and the market.
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Subject to these caveats, however, America can – and should – revise the decades-old contract to account for changed realities. The more China plays by the rules, the more such a revision would benefit developing countries that can trade with it.
For starters, China is no longer a poor country, but its status as a developing country entitles it to favorable treatment under global trade rules. This status must be revoked.
Second, China departed from the spirit of the original contract through beggar-thy-neighbor exchange-rate policies (especially from 2004 to 2010) that artificially preserved its economic competitiveness. That problem went away for a while, but is beginning to resurface.
The world must respond by codifying and enforcing rules on exchange-rate manipulation. And where the line between state and commercial entities is blurred – as it is in China – the definition of "excessive" intervention should be widened to include foreign-exchange purchases by state-owned banks as well as those by the central bank.
Third, the 2001 WTO accession agreement imposed obligations on China concerning its state-owned enterprises (SOEs). But, with the Chinese state playing a much larger direct and indirect economic role under Xi, these rules have to be adapted, tightened, and made more justiciable. Regarding Chinese investment abroad, for example, the world should treat skeptically China's claim that the government is distinct from SOEs because the latter are run on commercial principles. The burden of proof should be on China to prove this.
As for inward foreign investment, the basic aim should be to ensure a far more level playing field. The new rules should therefore cover not only explicit state policies but also the actions of SOEs, as well as more of China's government procurement policies and practices.
But Biden must first persuade China to agree to renegotiate the contract. Immediately removing all of President Donald Trump's unilateral tariffs on Chinese imports could help. The Biden administration could also lend quick support to the WTO, by approving the choice of the body's new director-general and restoring its Appellate Body. And the US could signal its willingness to join China-led international financial institutions such as the Asian Infrastructure Investment Bank, and to end the West's monopoly of the leadership of the World Bank and International Monetary Fund.
Beyond improving the atmospherics, Biden must consider his tactical options: unilateral, multilateral, and regional. In theory, he could go even further down the unilateral road than Trump by threatening China with a return to the pre-WTO arrangement under which its market access would be reviewed annually by a fickle, more protectionist Congress.
But, as Chad Bown of the Peterson Institute for International Economics has demonstrated, even the more limited Trump strategy has failed, because the world has become too dependent on China to embrace restrictive trade actions against it. Moreover, success would be enormously costly: the global trading system's integrity would be decimated, wrecking a half-century of international efforts.
Biden also has the multilateral option of renegotiating with China as part of an effort to revive the WTO, which has been languishing largely because of Trump's hostility to it. The problem is that China – as a WTO member with significant clout – would have to agree to any changes.
The Biden administration must therefore consider the regional route that Trump abandoned when he withdrew the US from the Trans-Pacific Partnership (TPP) in 2017. Rejoining its successor, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), would enable the US to integrate more deeply with the rest of Asia and possibly also with Europe, thereby reducing its dependence on China while inflicting de facto exclusion costs on it.
This strategy has major advantages. It would create a trading area that would complement, rather than undermine, the international trading system. And such a move would not be subject to a Chinese veto; in fact, it would likely force China to the negotiating table, because it would not want to be kept out of such a large market. But joining the CPTPP would not be painless: it would require the US to countenance more trade opening, which the current domestic mood might not allow.
The recent signing of the Regional Comprehensive Economic Partnership, a pan-Asian free-trade agreement including China, might seem to signal a different approach than that proposed here. But Asian countries have fewer options relative to China: They are more dependent on and integrated with it, and Trump's 2017 rejection of the TPP left them without an anchor for managing economic relations with China. After Trump, and considering China's increasing assertiveness, Asian countries might go along with or even secretly hope the US and Europe reset relations with China.
In any event, Biden should have no illusions: China is too important to ignore, but the challenge it presents defies easy solutions. America and the world should brace themselves for the long haul.