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Why Would Billionaires Ever Want a Wealth Tax?

By Dan Caplinger – Jun 29, 2019 at 6:02PM

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Advocating for higher taxes for yourself doesn't seem like a smart strategy.

It's still well over a year before the 2020 presidential election, but already, a huge group of candidates has not only formed but started to debate key issues facing the nation. One idea that has become popular among many candidates is addressing the income and wealth inequality that the U.S. faces by imposing new taxes on the richest American taxpayers.

Back in January, Democratic presidential candidate Sen. Elizabeth Warren of Massachusetts proposed a new wealth tax on Americans. With a threshold set high enough to affect only the smallest number of taxpayers, the Warren proposal attracted attention from both advocates and opponents. Yet just last week, 20 individuals purporting to be among the top 0.1% in the U.S. in terms of financial net worth called on all candidates for president to support a wealth tax -- even though they'd be among those who'd have to pay it.

What a wealth tax might look like

To understand exactly how a wealth tax would work, the Warren proposal offers a reasonable example. Under the terms of the proposal, those Americans whose assets are worth more than $50 million would pay a 2% wealth tax on the amount by which their net worth exceeded the threshold. For example, if you had $60 million in assets, then you would pay the 2% tax on $60 million minus $50 million. That would result in a wealth tax of $200,000. For billionaires, an additional 1 percentage point surtax would apply, making the total tax rate 3%.

Six gold bars stacked in a pyramid.

Image source: Getty Images.

Proponents of the proposal like it for a couple of reasons. First, it would put the burden of taxes squarely on those with the most money to pay them, potentially reducing wealth inequality. Moreover, targeting those with the most to pay could generate considerable amounts of revenue, with some estimates predicting $2.75 trillion in taxes over a 10-year period from roughly 75,000 American taxpayers.

Why some wealthy people want to pay a wealth tax

One might think that people like George Soros, Facebook co-founder Chris Hughes, and current and future heirs like Abigail Disney and Molly Munger would oppose wealth taxes on the basis that they'd be the people hit hardest by the tax. Yet they and 15 other wealthy Americans support such a tax, and they made their reasoning clear in an open letter to the 2020 presidential candidates.

The reasoning of these billionaires and multi-millionaires boiled down to several key points:

  • Revenue from a wealth tax could reinvigorate the U.S. economy, allowing for investment in infrastructure, education, child care, and job creation to boost productivity and promote growth.
  • A wealth tax would help alleviate perceived unfairness in income tax rates, where ultra-wealthy taxpayers often get preferential treatment for the types of income on which they commonly rely.
  • Paying something closer to what one can afford gives wealthy Americans an opportunity to meet their patriotic duty and reduces the concentration of money that threatens to erode democracy in favor of interest-driven politics.
  • Major problems like healthcare and climate change require huge amounts of capital to implement solutions, and only a wealth tax has the capacity to produce sufficient financial resources to meet those challenges effectively.

What's behind the letter?

Even with this explanation, it's reasonable to try to look between the lines to search for other motivations. Although any taxpayer could voluntarily pay more in tax to the U.S. Treasury, those signing this open letter likely want the burden spread fairly across the ranks of the wealthiest American taxpayers. Only if all top-net-worth Americans participate can they reach their goals.

Yet the proponents of the wealth tax seem to have a viewpoint that's different from what you'd see across most of the nation's population. Rather than working to cut their tax bills, these individuals stand ready to pay more if the resulting tax revenue gets used in a way they consider productive. It's likely that there'd be considerable debate among the ranks of the ultra-wealthy about what types of government spending would be appropriate or desirable.

Waiting for 2021

Given the current alignment of power in Washington, no wealth tax will pass before the 2020 election offers the public the opportunity to replace enough of those in office to get such legislation through. Yet if calls to enact a wealth tax get louder over the next year, it'll be interesting to see how big an issue it could become during the campaign.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Dan Caplinger owns shares of BRK-B and DIS. The Motley Fool owns shares of and recommends BRK-B, FB, and DIS. The Motley Fool has a disclosure policy.

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