The fight over taxes rages on as the presidential race continues. This election cycle has been focused on directly taxing wealth versus applying a value-added tax to purchases. Bryan Frew, CPA explains the difference and analyzes how their implementation will affect Americans.
There is one thing almost every Democrat can agree on: We need to find a way to collect tax on the biggest, most successful corporations and individuals. Unfortunately, there is not a consensus on how to achieve it. The United States already has a “progressive tax” in place—as taxable income rises, the tax rate increases. The top income tax rate is 37% for married taxpayers with taxable income over $612,350 after tax deductions. There are also special long-term capital gain rates, which encompass various sources of investment income. Many would argue our progressive tax doesn’t go far enough and that capital gains rates should also go away. Most taxpayers that benefit from capital gains rates are very wealthy already. This is true. Wealthy individuals and large corporations hire CPAs and tax lawyers to minimize their tax burden.
There are two other options presented to the American people during this election cycle: a wealth tax and a value-added tax (VAT). Sen. Elizabeth Warren is the most vocal promoter of the wealth tax. With her proposal, the “Ultra-Millionaire Tax,” anyone that has a net worth over $50 million pays a “2 cent” tax on their wealth, with billionaires paying up to 5 percent. This tax would hit a very small number of individuals, but raise $3.75 trillion over the next 10 years, according to the Warren campaign. That is almost as much as the federal government spends in a year. On the surface, it appears to be a great idea. An individual worth $100 million dollars can easily afford to part with $2 million per year, right?
Andrew Yang supports using a VAT instead. This tax is similar to a sales tax that states collect, except the tax is imposed on every stage of the production cycle rather than only on the end product or service. On the surface it seems like a bad idea because all consumers will be hit and collecting pennies billions of times seems more difficult to administer than collecting large amounts of money a few thousand times.
The biggest argument against the VAT is that it is considered a “regressive tax,” which means the heaviest burden falls on low-income families. A VAT by itself taxes a higher percentage of a low-income earner’s available funds than a high-income earner’s. To counteract this, Andrew Yang proposes to couple the VAT with his “Freedom Dividend” of $1000 per month, per adult citizen.
Let’s break it down by numbers. Say 10% VAT is collected on all items other than housing and healthcare, and the cost is passed on to the consumer. In order to be worse off, a single adult would need to spend $11,000 per month on top of housing and healthcare, $10,000 of goods and services with the other $1000 in VAT. On top of that, Yang proposes a progressive VAT with higher rates on luxury goods and lower rates or exempt status on staples. A family of four making $50,000 per year might spend $35,000 in consumables and $3,500 in VAT. But, they get an additional $24,000 from the Freedom Dividend, increasing disposable income by 43%.
Administering a VAT is surprisingly easy. A business simply charges their customer 10% on top of the cost. Monthly, they remit the collections to the government and take a credit for the VAT they have paid to their vendors. Let’s use a hair stylist as an example. In a month she charges $1100 for haircuts. Her expenses (shampoo, rental, utilities, etc.) were $550 ($50 in VAT). She will file the form and send $50 to the IRS ($100 she collected from her customer less the $50 she paid on the front end). This form can be completed in a few hours at most. Yang’s campaign estimates that the VAT will generate $800 billion in annual revenue. Yes, prices will increase, but only the wealthiest will pay more in VAT than they get with the Freedom Dividend. With more disposable income moving through the economy, saying the increased price would have a negative effect on the economy would appear to be a stretch.
The wealth tax is a great concept, but it’s not as simple as saying “Warren Buffet is worth $86 billion, so he should pay $4.3 billion (5%) to the IRS.” First, Warren Buffet doesn’t have $4.3 billion sitting in his checking account. Also, $86 billion is an estimate, not an actual number. Taxing people on estimates in not an option. So, we are going to need to get actual values of all his assets. We would start with cash in US dollars. Stock. Gold. Commodities. Those are relatively easy to value. Unfortunately, that is only a slice of his wealth. How about houses? Do we use fair market value, replacement cost, net book value, salvage value, Zillow? We would need to get the house appraised.
Even then, valuing Buffet’s houses is easier than most of his other assets. How does one value patents and copyrights? Trademarks and business practices? How about priceless art and jewelry? There are also other hard-to-value assets most super wealthy people own, from real estate holdings and closely-held businesses to customer lists and yachts. The list goes on forever. Someone worth $50 million dollars doesn’t even know every asset they own, much less a billionaire.
I didn’t even mention the assets that are held by trusts. Who is valuing these assets? If the taxpayer is burdened with presenting values for every asset they own, you better believe the best accountants, lawyers, and appraisers money can buy are going to document the values with extreme care to find the best value for their client.
There is no chance that the IRS would hire its own team to value the assets. One, the IRS would be in over their heads. And two, the millionaires and billionaires are not going to accept an agent’s assessment. The tax courts would be absolutely flooded. The IRS is already unable to keep up with the cases it has. Rich people will hire teams of CPAs and lawyers to study the new wealth tax law. These brilliant and experienced professionals will make adjustments to minimize their client’s tax burden. And if the IRS challenges the return, they will fight it. Also, being a US citizen will cost billionaires an additional $20 million a year; I would be shocked if we didn’t have a few hundred renounce their citizenship and take their wealth elsewhere.
The current federal estate tax return is similar to a wealth tax because we value all the assets owned by the taxpayer as of date of death and pay a “death tax.” Most of these returns take us over a year to file. The bigger ones almost always get audited and it could take 5 years to finally close the estate. The idea of forcing citizens to go through that process every year? It lacks common sense.
While the Wealth Tax sounds like a great idea, it simply will not work as intended. The VAT is easy and progressive when coupled with the Freedom Dividend. Even the best CPAs and lawyers cannot hide consumption and revenue. Amazon has $250 billion in revenue and showed $0 taxable income. It doesn’t matter how high the corporate rate is, Amazon still pays nothing in corporate income tax. With a VAT, Amazon alone puts $25 billion into the system which Yang will pass directly to us instead of ineffective and expensive government programs.