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Elizabeth Warren's Wealth Tax: Here's What You Need to Know

By Matthew Frankel, CFP® – Updated Jan 28, 2019 at 3:16PM

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Instead of creating a higher marginal tax rate, this 2020 Democratic presidential candidate is proposing a different way to increase taxes on the rich.

Although the 2020 presidential election is still 21 months away, the list of Democratic candidates is already forming, and we're even getting details on some tax proposals.

Elizabeth Warren recently unveiled a plan for a "wealth tax," which would apply to the richest Americans -- that is, those with more than $50 million in assets. Here's a look at what this would mean and whether it could actually happen.

Cash in rubber bands.

Image source: Getty Images.

Elizabeth Warren's wealth tax

Senator Elizabeth Warren (D-Mass) recently announced her proposal for a wealth tax, which would apply to Americans with more than $50 million in assets.

The tax, which Warren refers to as the "Ultra-Millionaire Tax," would raise $2.75 trillion over a 10-year period, according to economist Emmanuel Saez.

Here's how it would work. Americans with $50 million or more in assets would be assessed a 2% annual wealth tax, while those with $1 billion in assets or more would be assessed a 3% rate.

The plan would also increase funding to the IRS to help combat tax evasion, especially by the wealthy, and would also provide for a one-time tax penalty on people who renounce their U.S. citizenship in order to avoid paying the wealth tax.

Why tax wealth instead of increasing income taxes?

The idea of a wealth tax certainly makes sense to some degree. Currently, the United States only collects federal tax on income. Unfortunately for the IRS, many of the richest households in the nation don't have a lot of it.

Take Warren Buffett for example. The famous investor's net worth is estimated to be about $82.5 billion as I write this. However, the vast majority of Buffett's wealth is in the form of Berkshire Hathaway stock.

During the 2016 presidential campaign, Buffett released his 2015 tax return, which showed an income of about $11.6 million and tax paid of $1.8 million. Those are large numbers to most people reading this, but they're minuscule sums compared to Buffett's wealth. In fact, the $1.8 million in tax Buffett paid represents just 0.2% of his wealth. It's no surprise that many critics don't consider this to be "paying his fair share."

Would a wealth tax be practical?

There are also some practical considerations regarding the possible implementation of a wealth tax. For starters, while it's easy to determine someone's income (W-2s, 1099s, etc.), it can be rather difficult to determine the value of someone's assets.

For example, if the majority of an individual's wealth consists of real estate assets, their wealth becomes something of a matter of opinion. One appraiser may value a collection of properties at $45 million, while another may think the same portfolio is worth $50 million.

There's also the question of the tactics people could use to avoid the wealth tax. Warren's proposal has a provision to prevent people from renouncing their citizenship to avoid the tax, but that's far from the only path to reducing wealth (on paper). Could someone with say, $50.1 million in assets, simply give $100,000 away to charity and avoid the tax altogether?

And what happens if someone's wealth isn't easily accessible? For example, what if someone owns a business that's worth over $50 million but doesn't have any other substantial assets? Do they need to sell part of their business to pay the tax, or take out a bank loan for that purpose?

Further, would there be different asset thresholds for married couples and single taxpayers? If not, what's to prevent a married couple with $70 million in assets from divorcing for tax purposes so each spouse would only have $35 million?

To be fair, these are all details that could potentially be worked out. The point is that a wealth tax presents a lot of logistical issues that would make implementation rather complicated.

Could a wealth tax actually be implemented?

It's unclear at this time whether a wealth tax could even legally be implemented in the United States. Since Warren's proposal was made public, there has been considerable debate over its legality. Some have even gone so far as to call the proposal unconstitutional, including James Freeman in an opinion piece for The Wall Street Journal. Other experts have said that a wealth tax is perfectly legal.

Constitutional or not, Warren's wealth tax proposal is likely to be the subject of intense debate for the next 21 months, and it's unlikely to be the last one we'll hear from Democratic presidential hopefuls anytime soon, as there is more than one potential way to increase taxes on the rich.

Matthew Frankel, CFP owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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