Everyone is familiar with the two great lies of modern times: the check is in the mail, and “Of course I’ll still respect you in the morning.” To which should be added a third: “wealth taxes” will only affect the very rich—the middle class has nothing to fear. When you hear Democrats say this, reach for your wallet.
This needs to be kept in mind with thinking about President Biden’s new proposed “wealth tax,” which would impose a 20 percent tax on unrealized gains of liquid assets (i.e., stocks and bonds) for households with a net worth of more than $100 million. The Biden Administration claims this proposed tax will only hit the top 0.01 percent of taxpayers, with most of the incidence of the tax falling on billionaires.
Of course, this is what liberals told us about the Alternative Minimum Tax (AMT) back in the late 1960s, when the left created a scandal around the fact that 155 people with adjusted gross income above $200,000 paid zero income tax on their 1967 tax returns. (Adjusted for inflation, that would be around $1.5 million today.) As the internet clickbait headlines like to say, “You’ll never guess what happened next!” Of course you don’t need to guess: by 2017, before the Trump tax cut finally scaled back the AMT (but only temporarily because of our strange budget rules), 5.2 million households were caught up in it, a far cry from the few hundred originally targeted in 1969.
The same thing will surely happen with any “wealth tax” targeted at the super rich, and for the same reasons: inflation, and the insatiable appetite of liberals for revenue, which can only come in sufficient amounts by taxing the middle class. Devices like the AMT or a “wealth tax” are gimmicks to disguise this fact.
Thomas Hoenig of the Mercatus Center at George Mason University (and former president of the Federal Reserve Bank of Kansas City) warns in Barron’s:
The proposal sounds so simple. Report income and unrealized gains in liquid assets and tax them at a minimum of 20%—the assumption being that only the richest experience significant increases in asset values. However, the truth is that in a period of persistent asset inflation, which we have had now for decades, such a tax eventually would apply to an ever-larger proportion of the population, notably the middle class.
The income tax is a good example of how a tax on the wealthy becomes a tax on the middle class. In 1913, Congress passed the first income tax under the newly passed 16th Amendment to the Constitution, which topped out at 7% for income above $500,000. After a temporary, significant tax increase to pay for World War I, tax rates settled in at 25% on incomes above $100,000. It was only a matter of time before the politicians forgot about the “wealthy” part.
Not to mention that if the tax is applied only to liquid assets like stock and bonds, look for the super rich to shift their assets to non-liquid sectors like real estate, complicated private partnerships, and other investment vehicles designed specifically to evade the wealth tax. It will be a bonanza for tax lawyers and tax code lobbyists in Washington.
But Joe Biden will still respect you in the morning.