ProPublica's "The Secret IRS Files" and the difficulties of a wealth tax

I've seen a lot of discussion, little of it elucidating, and that from both supporters and negators of this work.

Among the few interesting observations is that unrealised wealth gains are difficult to assess (https://joindiaspora.com/posts/20937383#df8c1800ab2701399f60005056264835). This has objection has some merits, and I'd like to draw attention to it.

A tax basis should be:

• Equitable, assessed according to ability to pay.
• Certain, rather than arbitrary
• Convenien to pay
• Efficient to enact

I'm not just making these up, Adam Smith has discussion in Book V, Chapter 2, of his Wealth of Nations: https://en.wikisource.org/wiki/The_Wealth_of_Nations/Book_V/Chapter_2

Where income is at least in theory precisely denominated wealth appreciation is not transational, but is based on assumptions, notably:

• Of asset holdings themselves.
• Of the market value of those holdings.

Both are subject to uncertainty.

FIRE is Risk

For some time, I've come to view the "FIRE" sector of the economy --- finance, real estate, and insurance --- as having the common thread of risk. That is, each is based on the premise of assessing both the current market value and the associated uncertainty regarding that, of a portfolio --- debt and assets, real estate property holdings, insurance policies, respectively in each specific case. Whilst all economic activity embodies some degree of risk, it's in the FIRE sector that risk seems to be the principle, possibly only manageable component. Actors within the sector attempt risk management through diversification, information, modeling, prediction, outcomes management, expectations management, legislated liability or immunity, and direct management of both activities and entities engaged in the sector.

Notions of economic value are then inherently notions of risk. (Among numerous other confounding factors.)

The "but it's difficult to measure" argument has also been applied, for the record, to other forms of wealth accumulation common to high-net-worth (HNW) individuals, notably stock options. The response has been to note that such options clearly have some value, though the precise valuation may not be presently knowable. Because that value has a risk component.

The ... risk ... noted by the person raising this objection was that taxation of more assessible assets might result in a flight to even less readily assessed assets further compounding the problem.

Constructing a Wealth Tax

I see a few possible options here:

• Time-average asset value. If there's uncertainty in the present-year value of assets, use a rolling average (e.g., 2, 3, 5, .. , years) to asses value, and tax based on that. Future-weighting asset inflation might be discouraged by progressively taxing higher rates or quantities of appreciation --- better to realise tax on five years of 10% gains rather than a single year of 62% gains.
• Yes, asset deflation could then be applied toward tax credits. Similar logic would apply.
• Where a range of values is given, the tax basis is assessed at the high end of the range.
• Liquidity events trigger tax settlement, including arrearages, again at progressive rates. Keeping current and accurate is encouraged.
• Costs in computing taxable value and tax amount are assessed to the specific taxpayer in question, or institutions holding or facilitating such asset holding or transfers.
• A crude and old mechanism was for stamp taxes on assets of value. Implementing this in a modern age might prove difficult, but as an example , ancient Chinese paper money required stamp taxes to be recognised as legitimate, effectively a tax on holding paper wealth.
• There are a reasonably finite number of attractive asset shelters: real estate, stocks, bonds, derivatives, collectibles, and the like. Taxation of these, either in holding or transfer, increases carrying and exchange costs. Ultimately this should reduce the asset value of these investments, and return wealth to the common weal.

I'd very much like to see any substantive discussions of the strengths, weaknesses, pitfalls, and real-world behaviour of direct wealth taxation.

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Previously

#TheSecretIRSFiles #IRSFiles #SecretIRSFiles #WealthTax #inequality #value #FireSector #risk #tax #taxes #inequality #ProPublica

The Secret IRS Files: Trove of Never-Before-Seen Records Reveal How the Wealthiest Avoid Income Tax

ProPublic have had a large collection of raw IRS data fall into their hands.

Taken together, it demolishes the cornerstone myth of the American tax system: that everyone pays their fair share and the richest Americans pay the most. The IRS records show that the wealthiest can — perfectly legally — pay income taxes that are only a tiny fraction of the hundreds of millions, if not billions, their fortunes grow each year.

The keystone of the analysis is this:

... To capture the financial reality of the richest Americans, ProPublica undertook an analysis that has never been done before. We compared how much in taxes the 25 richest Americans paid each year to how much Forbes estimated their wealth grew in that same time period.

We’re going to call this their true tax rate.

The results are stark. According to Forbes, those 25 people saw their worth rise a collective $401 billion from 2014 to 2018. They paid a total of $13.6 billion in federal income taxes in those five years, the IRS data shows. That’s a staggering sum, but it amounts to a true tax rate of only 3.4%.

It’s a completely different picture for middle-class Americans, for example, wage earners in their early 40s who have amassed a typical amount of wealth for people their age. From 2014 to 2018, such households saw their net worth expand by about $65,000 after taxes on average, mostly due to the rise in value of their homes. But because the vast bulk of their earnings were salaries, their tax bills were almost as much, nearly $62,000, over that five-year period. ...

This is a long article. Pocket estimates a 25 minute read. Please read it before commenting.

What seems to be getting labled "The Secret IRS Files" is a data-based exploration of the inequality-generating engine that is the US tax system, formed through legislation and case law (notably Eisner v. Macomer). It's a complex topic, and ProPublica's Jesse Eisinger, Jeff Ernsthausen and Paul Kiel do an excellent job of making it relatable and comprehensible.

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A few points to keep in mind for discussion.

The central thesis of the article is that income-based taxation, particularly as it has evolved in the US, is an engine that grows and amplifies extreme wealth inequalities. This datum, in combination with much other work, suggests fundamental problems with the dominant economic, political, and financial paradigm. The end-result is ugly and catastrophic, as documented by authors such as Thomas Piketty (Capital in the Twenty-First Century and Capital and Ideology), Richard G. Wilkinson and Kate Pickett (Spirit Level), Branko Milanovic (The Haves and the Have-Nots), Chrystia Freeland (Plutocrats), and a tradition in economics and philosophy stretching to the dawn of history, often foundational to major world religions and belief systems.

There's an overarching fixation in virtually all tax-policy discussion to income and consumption taxes, both of which are overwhelmingly regressive, as if they were the only options. This is simply not the case, and represents a pathological case of the is-ought fallacy The notion of wealth tax is virtually never raised, and when it does appear, meets with, for some strange and inexplicable reason,[1] violent opposition. ProPublica's focus on wealth rather than income is not a misunderstanding, it is the central point of the analysis.

At the same time, the "perfect tax" of Adam Smith, David Ricardo, Henry George, and Milton Friedman, is a wealth tax in the form of a land-value tax. ProPublica don't call for this specifically, and a land-value tax is probably not a complete solution to the present dysfunction, but it's a start, and more importantly, an example of bases for taxation which extends the conventional discussion. Reading and thinking through the dynamics and issues raised in ProPublica's reporting, a few other possibilities come to mind:

• Straight-up wealth taxes, indexed to net holdings.
• Taxing interest or loans, as a percentage. (Are interests and/or loans price elastic, and what might be the effects of various tax bases, e.g., principle vs. interest vs. payment?)
• Inheritance taxes.
• Taxing all monetary transfers, including internal payments within commercial entities, or payments or credits between corporate entities (especially: shell companies).
• Differential currency grades, with issuance and expiry schedules. (This gets wonky and complicated, but would see different circulating currencies, effectively, for retail, wholesale, and financial transactions, each of which could be independently managed. It's based in part on the observation that bi- and tri-metallic currency schemes of the past often effectively achieved this, as with copper-based pence, silver-based pounds, and gold-based guineas under English/British currency, discussed at length in Adam Smith's Wealth of Nations. China at one point had stamp taxes on its paper currency, achieving much the same ends.)
• Taxing financial transactions, stock trades, issuances, grants or exercising of options and other derivatives, etc.

I'd be interested in the ideas others offer.

I'm not in the least interested in shallow dismissals or ideological diatribes.

Cory Doctorow published an excellent digest earlier today through Pluralistic, recommended reading: https://pluralistic.net/2021/06/08/leona-helmsley-was-a-pioneer/#eat-the-rich

ProPublica have a short-form highlights precis here: https://www.propublica.org/article/the-secret-irs-files-short-form-a-quick-guide-to-what-we-uncovered (7 minutes)

https://www.propublica.org/article/the-secret-irs-files-trove-of-never-before-seen-records-reveal-how-the-wealthiest-avoid-income-tax

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Notes:

1. This, dear reader, is sarcasm.

#ProPublica #TheSecretIRSFiles #SecretIRSFiles #tax #taxes #irs #IncomeTax #WealthTax #DataLeaks #IrsFiles #wealth #income #inequality #JesseEisinger #JeffErnsthausen #PaulKiel