Senator Elizabeth Warren’s campaign promise to fund social programs by making America’s wealthiest pay a small percentage of their fortune every year could create a costly and difficult compliance system for both the taxpayers and the IRS.
A wealth tax affecting the country’s 75,000 richest households could raise $2.75 trillion over the next decade, according to Warren’s plan. This proposal is her answer when asked how she plans to play for expanded child care and debt-free college -- assuming it could actually be implemented.
“It would be difficult for the Service to get its arms around the wealth tax,” said Mark Everson, a former Internal Revenue Service commissioner, referring to the agency’s nickname in tax circles. “The more money people have the more they tend to have in non-traditional assets.”
Warren envisions a yearly tax on household wealth -- 2% on fortunes of more than $50 million and 3% above $1 billion -- as a way to reduce wealth inequality and pay for progressive priorities. The concept is simple enough: Every asset is counted, an expanded IRS audit force would ensure that people pay, and rich individuals who leave the country to avoid the wealth tax have to pay an exit penalty.
Determining how much someone is worth, however, is complex and can often lead to contentious standoffs between taxpayers and the government. Warren’s plan would rely on a combination of people self-reporting the value of their assets, as well as the IRS obtaining some data from banks and financial institutions.
Web Of Investments
Some of this is within current IRS practice, according to Gabriel Zucman, an economist at the University of California at Berkeley who advised Warren on her plan. The agency already collects some income flow information -- interest income, dividends, capital gains -- through banks, mortgage lenders, mutual funds and insurance companies.
It would be very simple to add one line on these information returns with the end-of-year account balances, Zucman said. The IRS already keeps tabs on household wealth using forms reporting the end-of-year value of individual retirement accounts.
The hard part comes when wealthy people don’t just have cash, stocks and bonds that can be easily valued. People worth more than $50 million tend to have a complex web of investments that can include highly speculative assets, such as oil and gas rights or minority stakes in privately-held companies, where good-faith appraisers could vastly disagree on the value.
People apt to cheat on their taxes will always find ways to suppress their net worth to minimize the amount of tax they have to pay or avoid it entirely. But the subjective nature of appraisals leave a lot of room for reasonable people to disagree. Factors including the size of the taxpayer’s stake in a company, the existence of comparable publicly traded companies, the ease of selling the business and future risk factors -- such as a business located in a flood plain or volatile oil prices -- can each affect the value by as much as 40%.