Finance Fairer Tax System - WM Advantageous Treatment of the Wealthy

Finance, Fiscal Responsibility and Economic Growth: Creating Opportunity Through a Fairer Tax System, April 27, 2021

WM, Special Revenue, Funding Our Nation's Priorities: Reforming the Tax Code's Advantageous Treatment of the Wealthy, May 12, 2021

If you want to dwarf any wealth tax, adopt the asset value added tax laid out in our tax plan, but end the exception for capital gains and income by mutual funds. This would limit the amount of wealth accumulated by the top 10% of households. 

An impact analysis on households is forthcoming, however note that the Federal Reserve Survey of Consumer Finance shows that the top 10% of households own 80% of mutual fund assets. That relationship duplicates itself within the top 10%, so that the top 1450 households hold approximately 33% of such assets. An asset value tax, which takes capital gains and returns off of personal income taxes and onto transactions would be a huge moneymaker as it is. End the exemption for mutual funds and the amount doubles.

Zero rate sales to qualified ESOPs and watch capitalists run for the exits. A wealth tax takes advantage of inequality. This provision starts to end it.

The Nature of Wealth

Money is not only a medium to exchange goods. It is also a decision tool to exchange power. Power is the ability to demand resources and labor. Capitalism seeks to consolidate this power into the hands of the owners of capital. Socialism seeks to distribute this power to society, using common action to do so. State capitalism and state socialism are the same thing, with modern mixed economies consisting of private capitalism and social democracy.

Karl Marx understood the economics of production. When he wrote, finance was a game, not a science. He had no idea that the Boom-Bust Cycle exists because of the interaction of tax and finance. Modern Marxists are still obsessed with rewarding production rather than considering the entire enterprise. Enabling workers are as essential as production, from distribution to design to marketing. Worse, they are not really up to speed on how the economics of the CEO and tax policy are interrelated or how to go from democratic socialism to the real thing.

Social Democrats have no clue either. Indeed, most Democratic Socialists, like Bernie Sanders, have mostly Social Democratic tools in their kit. Free college and Medicare for All are not really socialism, they are simply better birdseed. Elizabeth Warren at least admits that she is still a capitalist. So do the Social Democrats of Scandinavia and Western Europe. Their proposals have no clue on how to get from Social Democracy to Democratic Socialism – or to the real thing.

The essential fact in any system that uses money is that money buys work from people. Since work is a function of time, as our lives, money essentially buys people. Another way to look at money and savings is through class analysis. Savings is the power to make others work without working yourself. When realized, savings purchase essentials and luxuries. Even poor people deserve some level of luxury.

In an unbalanced economy, the working class do not even receive the essentials. Scarcity in essential goods is the incentive used to compel work. Inadequate income is used to compel work on a consistent basis. The argument against guaranteed income is that if work can be compelled, hyperinflation and shortages result.

The Nature of Income

Income is the return on assets, including sold labor. This includes the return on taxation of assets. The challenge for public policy is providing for adequate income and assets for all households so that no worker can be considered someone else's property. How badly we have failed at this is impossible to see until we look clearly at the elements of the "supply side."

Absolute Income is adjusted gross income plus unrealized income. Wealth taxes are an attempt to go after part two, in its stored form, on an annual basis. They will never pass because, if done correctly, the wealth will be destroyed. For some, that is likely the goal. If it is done ineffectively (by self-reporting or creating loopholes) it legitimates assets which have no inherent value.

In the macro-economy, absolute income is gross national product plus stored future income plus speculative income. Current economic discourse and statistics do not, and likely cannot, capture the difference between the last two, although looking at income class helps.

This inability to separate future spending from speculation does not mean we cannot quantify unrealized income. Doing so shows why taxing wealth and unrealized income are close to impossible. Here is a hint: it does not really exist. Once that secret is out, capitalism' s days are numbered.

Unrealized income =

the net unrealized gain on traded equity and securitized assets held for less than a year

+ the unrealized net gain on assets held for more than a year

+ additions to retained earnings for the year that are attributable to shareholders or partners if it were to be distributed

+ increased value in a year of physical assets less their distribution expense.

All of the above include increased asset values and undistributed earnings for assets held offshore.

Asset prices and retained income and asset book values can be valued and are related but are not mutually exclusive. Asset prices may or may not reflect retained earnings and physical or market value of real assets and may, in fact, be junk assets based on fraud. Bonds have the same features and are valuable based on currently expected future income - including whether tax income attributable from holding these bonds can ever be collected.

All value is market based. These values may or may not relate to the productive power of the underlying physical and human assets. Mass resignations and innovations may turn today's intellectual property into dust. This is why capitalism is a less than perfect driver of real innovation. Income inequality and hierarchical control are designed to protect against sudden devaluations in both private and state capitalism. Individual and cooperative socialist organizations (from communes to partnerships) always threaten intellectual property held by capitalists.

Taxing Wealth

Anything that can be valued can be taxed. Indeed, it may even be easier to tax than capital gains, which largely rely on self reporting. Either total wealth and growth in wealth can be taxed in the micro level. Unrealized income can be estimated by the entities owned as of December 31st of each year. Any overlap between stock price and retained earnings can be taken into account. Indeed, reporting this would be beneficial to investors. This is the easy part.

The hard part is generating the liquidity to pay the tax. Actually, this is not hard at all. It merely requires the entity owned to write a check. You could not tax corporate income and the investor's share of it twice. If wealth were to be taxed, it is easier to tax the total value of the entity rather than taxing its owners. It is much less work.

Who really shoulders the burden is a more serious concern. Because of the monopsonist nature of most employment and the monopolist nature of most goods, the wealthy will not pay it.

First, stock prices will go down to reduce burden.

Second, wages will go down.

Third, consumer prices will go up.

Firms have people who run the numbers and a duty to maximize shareholder value. Indeed, internal rents will increase because the labor to make such calculations will be taken from the labor surplus generated from extraction, production, distribution and enabling work.

Debt Ownership and Tax Reform

Getting the wealthy and upper-middle classes on board is essential to reform. The way to do this is to make clear who owes and owns the debt. Space limits prevent a thorough discussion of this, but I have attached a summary from my forthcoming book, Debt as Class Warfare in an attachment. When it is complete, I will send copies to the whole Committee and will be available to discuss it in detail.

An Asset Value Added Tax, which is described below, captures a fifth of each trade or return from capital when bought or paid. It is a much more efficient way to extract the money. These include marking the base to market at option exercise and the first sale after inheritance, gift or donation and zero rates sales to qualified Employee Stock Ownership Plans.  There is a huge volume of literature on how employee-ownership expands opportunity, including a fair bit of it by me. We can discuss this as well at a later time.

Please see a second attachment detailing the Center’s Tax Reform proposals. These also include a proposal to create tax prepayment bonds to shift wealth from speculation and market debt to federal debt retirement.

The nation has already taken steps on the journey to reform in passing the American Rescue Plan Act. 

The ARPA has its pluses and its minuses. On the minus side, families who had adequate income during the pandemic now have money to blow. Instead of spending it they are using it to speculate. Masses of people are about to enter the bottom half of EFT and Crypto markets, which will allow the top tiers of the scheme (whose seed money was provided by the Ryan-Brady-Trump tax cuts) to get out.

On the plus side, the increased child tax credit and its new refundability will provide long term economic security families. The second essential step is to increase the minimum wage so that no one has to work for free or have a decreased standard of living without working by living solely on the CTC. 

The minimum wage should be immediately increased to match the Republican offer of $10 per hour. To return wages to 1965 levels, which rewarded productivity gains, the wage should be increased over time to $12 per hour and adjusted for inflation automatically every year, starting now. The current challenge in implementing a higher CTC is how to get the money to families immediately. Doing so through direct IRS payments cannot be a long term solution.

There are two avenues to distribute money to families. The first is to add CTC benefits to unemployment, retirement, educational (TANF and college) and disability benefits. The CTC should be high enough to replace survivor’s benefits for children. 

The second is to distribute them with pay through employers. This can be done with long term tax reform, but in the interim can be accomplished by having employers start increasing wages immediately to distribute the credit to workers and their families, allowing them to subtract these payments from their quarterly corporate or income tax bills.

Over the long-haul, tax reform is necessary to cement these gains. Please see our tax reform plan in the third attachment. It is designed to provide adequate income and services to families (both with increased minimum wages and child tax credits) through employer-paid taxes, funding government services through a goods and services tax, separating out taxation of capital gains and income from income to an asset value added tax and higher tier subtraction VAT collections on wage income up to the $330,000 level and above, with additional personal income taxation for incomes over $425,000. 

The top rates for higher tier subtraction VAT, personal income taxes and asset VAT would all be set to the same rate, say 26%, so that forms of income are not manipulated to avoid taxation. It would also effectively raise taxes on salaried income to 52%, with capital incomes reinvested or investments funded by salary income adding an additional 26% of taxation. Spending money will also trigger taxation. 

Adding the effect of lower tier subtraction VAT collection to taxation on business owners and the top marginal rate approaches 90%. Such taxes are meant to prevent payment of extreme salaries rather than maximizing revenue. This provides more wages to the rest of the population, especially to those who are not adequately compensated at lower income levels.

Reform allows a rebalancing of fiscal responsibilities. The federal child tax credit we propose, plus increases in the minimum wage to at least $12/hour may provide enough family income in most states. Other states would add additional support through a state subtraction VAT.  Comprehensive reform will truly end welfare as we know it by giving families what they need for a decent living.

Human Capital Funding and State Government Participation

The state SVAT would fund education, with options for funding private schools either as donors or clients. Espinoza v. Montana has settled the question of whether this is constitutional. Now the question is the political will to enact such tuition support and for private schools to allow teachers to organize. 

It would also fund remedial education, english as a second language (regardless of immigration status), junior college and technical education and pay for all students who have completed sophomore year in high school or, after their cohort has reached that level.

Retail sales taxes, corporate income and most personal income tax filing would be replaced with the SVAT and a border adjustable goods and services credit-invoice tax (which we call IVAT for short). The state-level IVAT would fund public safety and commercial regulation. Property taxes, without the burden of funding education, would fun both building inspections and local public works, with the latter supplemented by tolls, motor fuel and/or carbon value added taxes (also receipt visible). 

States would collect federal SVAT and IVAT, review compliance audits and investigate and prosecute criminal violations.

An asset VAT at the state level would collect taxes on rental income (as would the federal AVAT), with states collecting an additional AVAT on real property transfers with price appreciation. This levy would be collected at closing and forwarded to states. Other AVAT collections would be collected by brokers and submitted to the U.S. Securities and Exchange Commission. 

Any state AVAT collected on financial transactions would be forwarded to the states by the SEC. I would not recommend state enactment of such levies should an international or OECD AVAT rate be negotiated. This type of competition leads to a race to the bottom.

Any state-level debt service and retirement would be satisfied by higher salary surtax. State constitutional amendments to implement these changes would also include permission to incur debt in a federally declared disaster. This debt would be satisfied by any federal disaster assistance and the salary surtax.

Attachment: The Debt as Class Warfare

Attachment: Tax Reform