By Bob Deutsch, CTA, Senior Tax Counsel
(All monetary references are to USD)
I have just returned from holidaying in North America – what a spectacular sight to witness the fall colours in Vermont and New Hampshire.
While there, I took the opportunity to read some of the local papers which are understandably swamped with articles about the 2020 Presidential election. Many obsess about Donald Trump’s chances of re-election; many others about the obviously related question as to who the Democratic party’s likely nominee will be.
Tax seems to be looming as a contentious issue, much like it was in our own May 2019 election.
What caught my eye in particular were the tax policies of two of the Democratic party’s front runners – namely Elizabeth Warren and Bernie Sanders. Both are advocating a big spending plan to be partially funded by a new comprehensive annual wealth tax – the likes of which are likely to terrify a large part of a very sceptical electorate.
Firstly, the Warren proposal, at least in its broad conceptual terms, is quite straight-forward – a wealth tax on the net wealth of an individual or family of:
• 2% on amounts above $20 million and up to $1 billion; and
• 3% on amounts above $1 billion.
Secondly, the Sanders proposal is far more complex with different brackets for single filers versus married filers. The rates are more complex starting at 1% for amounts from $32 million up to $50 million and then ratcheting up in 1% increments to 8% on amounts in excess of a whopping $10 billion.
The Warren plan would, on current estimated numbers, apply to 70,000 US households and is projected to raise about $2.6 trillion over the first decade of its operation. By comparison, the Sanders plan would apply to an estimated 180,000 US households and is projected to raise some $4.35 trillion over the first decade of its operation.
These are big numbers but all the numbers in the US are much bigger than what we are accustomed to here in Australia. To put them in context, annual Federal budget outlays in the US sit at $4.4 trillion so an annual trawl from the Warren wealth tax plan of $260 billion a year is not much. Further, both plans are designed to fund, at least in part, a new comprehensive very expensive “Medicare for all” package in the US which both candidates are pushing to varying degrees.
Few countries have opted to adopt such taxes with some notable exceptions. France is one such exception where a wealth tax (called “impot de solidarite sur la fortune” – ISF) has been imposed since 1989. Liability for ISF at rates ranging from 0.5 to 1.5% is triggered where net personal wealth is greater than €1.3m and is then applied on net assets above €800,000. An annual wealth tax is not the only big ticket tax plan being considered by Democratic party candidates – others include:
• Raising the top marginal tax rate: One suggestion is a top marginal tax rate of 70% (that’s not a misprint) on incomes above $10 million. The current top rate is 37% although interestingly it once was 77%. Individual states also impose their own income taxes. Personally, I don’t care what level of income we are talking about. A marginal income tax rate of 70% is bordering on confiscation rather than taxation and should not be endorsed under any circumstances;
• Raising the Federal Estate Tax: The Warren plan involves new estate tax rates of 55% and 75%; the Sanders plan 45% up to 77% (also not misprints) on estates worth more than $10 billion. The current position is complex, but the top rate appears to be 40%. Individual states also impose their own similar taxes – 15 states and Washington DC have an estate tax; 6 states have an inheritance tax and Maryland has both. I make the same comment about a 77% estate tax rate as I made above in relation to a marginal income tax rate of 70%;
• Raising the capital gains tax rates: The main more moderate contender, former Vice President Joe Biden, wants to almost double the rate from 20% to 39.6%. There have been other more radical views expressed by the Democrats to tax unrealised gains on an annual basis, but as far as I am aware, such suggestions have not been embraced by any of the Democrat contenders.
As you can see, there are a lot of proposals floating around – some quite radical, some more moderate. There does however appear to be a common theme – taxing capital and capital accumulations and unearned income more heavily than they are currently. This is part of a broader concern that there is too strong an emphasis on taxing earned income.
All this has strong echoes of the Australian experience – at the last election Labor advocated for limits on negative gearing, removal of excess franking credit refunds, halving the CGT discount, reintroducing the 2% Budget repair levy and taxing discretionary trust distributions at a minimum of 30%. These too were in large part about extracting more tax from unearned income/capital gains.
That did not play out so well for Labor in Australia and the Democratic contenders for the US Presidency need to remember that advocating for new and higher existing taxes has rarely led to victory at the ballot box in any part of the western world. The only time I can remember a campaign successfully run advocating a new tax was John Howard’s “GST election” of 1999.
Back to the US, the contenders advocating for wealth taxes will soon be caught up trying to explain the detail of their proposals. This will force them to confront many difficult questions such as:
• Which assets are to be included? The family home? Personal effects such as jewellery?
• How and how often will assets be valued?
• Do secured/unsecured liabilities reduce the amount to be counted?
• How will taxpayers with large business assets be required to value internally generated goodwill?
So as not to overstate the position, Warren and Sanders are seen as two progressive left-leaning candidates. There is are further dozen or so candidates with the likelihood at the time of writing that the former New York Mayor, Michael Bloomberg will join the fray. The others have not been strong on broad tax reform, but more is likely to emerge in coming weeks as the field begins to narrow.
The need for a new complex annual wealth tax as advocated by Warren/Sanders with all the uncertainties it embraces, is not in my view a solution that most Americans are likely to embrace. From a policy perspective, wealth taxes have proven over the years to be difficult to administer and often easily avoided. As always, the broader any exemptions are drafted, the more tax planning will go into those very exemptions. How grand and opulent will the American home become if it is excluded from the wealth tax base.
In my view, the incumbent at the White House must be rubbing his hands in glee at the possibility that Warren or Sanders will be his opponent come 3 November 2020.