Should the American Government Tax Wealth? If So, How?
Yes, the American government should tax wealth. But how can we do it efficiently without causing upheaval in the economy?
Introduction
The debate over taxing wealth in the United States persists. While some argue that taxing wealth is ineffective and overly punitive, others contend that it is necessary for addressing socio-economic disparities.
The Case for Taxing Wealth
Taxing the wealthy more can contribute to essential services and social programs. This approach is justified when the tax revenues fund initiatives such as paying down the national debt or reducing the cost of prescription medication through subsidies.
Current and Proposed Changes to the Tax System
FICA Taxes: The FICA (Federal Insurance Contributions Act) tax system imposes significant burdens on lower-income earners. Currently, the cap on FICA taxes is set at $124,000, but this cap should be adjusted to a progressive scale to include higher-income earners.
Capital Gains Tax: The current capital gains tax system is inherently unfair. It treats all income equally, regardless of the source. A progressive capital gains tax system is more equitable. This means the wealthy would pay a higher percentage of their capital gains, while lower-income earners would bear a lower burden.
Warren's Wealth Tax Proposal: Elizabeth Warren’s wealth tax proposal, which calls for taxing assets beyond a certain threshold, is problematic. It would unfairly penalize individuals who may have accumulated wealth over generations, and it creates a vast administrative burden.
Specific Tax Proposals
Raise Taxes on Ordinary Income: Raising taxes on ordinary income is not as effective as eliminating deductions or increasing the threshold for capital gains tax. These measures would reduce tax evasion and boost revenue.
Reclassify Capital Gains: Short-term capital gains should be reclassified as ordinary income, subject to a higher tax rate. Additionally, a standard deduction-like policy for capital gains could be implemented to allow small business owners to sell their assets tax-free up to a million dollars in a lifetime.
Tax Unrealized Gains: While this idea mirrors the wealth tax concept, it has significant flaws. Taxing unrealized gains would create a complex and unmanageable system, burdened by the need to assess individual assets accurately.
Reform or Replace the Estate Tax: The estate tax, though punitive, can be reformed. Instead of a step-up in capital gains tax, an alternative could be to allow heirs to maintain the original valuation of the asset, with a tax rate applicable only upon sale.
Conclusion
While taxing wealth makes sense in certain contexts, it must be done thoughtfully. A progressive approach to both income and capital gains taxes would distribute the tax burden more equitably. Eliminating or reforming the estate tax would also contribute to a fairer system. Ultimately, a well-designed tax system can help address economic inequality without stifling economic growth or causing significant disruptions.
In summary, taxing wealth is not inherently bad, but it must be implemented with forethought to ensure it achieves its socio-economic goals without unnecessary complications.