Raise Billions From Billionaires? Tax Experts Say It’s Not That Simple

Raise Billions From Billionaires? Tax Experts Say It’s Not That Simple


One of the signature initiatives of Elizabeth Warren’s presidential campaign is a wealth tax that, she says, would pay for many of the programs she proposes, like government-paid health care and free college tuition. Bernie Sanders, one of her opponents in the Democratic race, has proposed his own version of a wealth tax that would collect, according to estimates, about $4 trillion over a 10-year period, or $500 billion more than Senator Warren’s plan.

But here’s the big question: Would the proposals, elegant in theory, work in practice?

Lawyers and advisers to the wealthy say there is no way the wealth taxes would collect anything close to the estimates, and they cite ample evidence of taxes that are reduced or eliminated through extensive and sometimes aggressive strategies.

“I’m not saying if it’s a good or a bad thing, but it is hard to implement,” said Eugene Pollingue Jr., a partner at Saul Ewing Arnstein & Lehr in West Palm Beach, Fla. “It sounds simple: Just pay X percent on your assets every year. But it’s not simple to determine the value of those assets.”

Gabriel Zucman, an economics professor at the University of California, Berkeley, who was one of the lead advisers on the Warren and Sanders wealth tax proposals, begs to differ. He said in an interview that he had solutions for many of the concerns and criticisms of the plans, including how to value private companies and illiquid assets.

“The I.R.S. already collects a lot of information about wealth, as it does with income,” he said. “That could be extended. They could look at the wealth of the richest Americans and say your net worth is $100 million.”

History is on the side of the tax minimizer. Last year, in fact, the 400 wealthiest families in America had a lower tax rate — 23 percent — than almost anyone else, according to data in Mr. Zucman’s new book, “The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay,” which he wrote with Emmanuel Saez, another economist at Berkeley. Taxes that hit the wealthiest the hardest, like the estate tax and corporate taxes, have fallen over the last few decades, the economists found, while tax avoidance has become more common.

Name a tax and there’s a way to reduce it, delay it or not ever really pay it, if you have the right adviser.

Upset that the 2017 tax act took away your deduction for state and local taxes in New York? Change your residence to Florida, as President Trump recently did, and those taxes are gone.

Don’t want to pay capital gains tax? Well, you can decide when to sell those investments. If you need the money, you could borrow against the account and leave the capital gains taxes for another day. And if you die still holding those securities, your heirs get them with any tax on the capital gains erased.

If it’s a big income year and your tax bill is going to be huge, you can always put years’ worth of charitable giving into a donor-advised fund: The tax write-off is yours today, but you can make donations whenever you feel like it — or leave it to your children to decide.

The list of ways the wealthy can reduce their taxes goes on. The tax most similar to a wealth tax is the estate tax, which values your entire estate and taxes it. Few people pay the estate tax these days because the exemption level is more than $22 million for a couple. But for those who do, reducing the value of what might one day be taxed is like a game of chess, with the financial adviser as grandmaster and the tax auditor as novice player.

Would an annual tax on wealth, targeted at the same people who use the best tax advisers to reduce their estate tax, somehow be free of loopholes?

“With the wealth tax, there are plenty of people who can access top-tier advisers and come up with creative ways to avoid it,” said Kimberly Clouse, founder and chief executive of Via Global Advisors. And she said those wealthy people are just doing sophisticated tax planning, and not what she called “intergalactic Isle of Man-type planning,” where assets are held offshore and owned by a web of corporations that obscure their owner’s identity.

The senators’ proposed wealth taxes seem straightforward, with the rates rising as the wealth rises. Senator Warren’s version has just two brackets: 2 percent for assets over $50 million and 6 percent over $1 billion. Senator Sanders’s plan is more graduated, like the income tax: It starts at 2 percent for assets over $32 million and hits a maximum of 8 percent over $10 billion.

In addition to raising revenue, the senators are aiming to use their plans to reduce income inequality. Several calculations show how much less wealth billionaires would have had this tax been enacted in the 1980s. Bill Gates’s wealth would be a fraction of what it is today, while Jeff Bezos’ fortune would be about a third. Both, though, would still be billionaires.

Professor Zucman said a wealth tax would be different from other taxes that have been skirted. He envisions a way in which the Internal Revenue Service would prepopulate the tax return with an estimate of the person’s wealth.

Tax advisers disagree. The values in an estate tax return are almost always contested by the I.R.S. “We file something as thick as a phone book with all these valuations and then the I.R.S. fights us over it,” Mr. Pollingue said.

Take a commercial building, which has a fixed value only when it is sold. Since an estate is valuing it, not selling it, the estate is submitting an estimate. What the estate’s appraiser says it’s worth and what the I.R.S.’s auditor says it’s worth aren’t always the same.

“Valuations can differ greatly,” said Jared Feldman, head of the private client group at Anchin, a tax advisory firm. “Who does them?”

The homes of the very wealthy are not standard ranches or center-hall colonials. “These families have distinctive homes” so there are limited comparable properties, Mr. Feldman added. “So how does that work?”

Professor Zucman had two responses. First, he said his research with Professor Saez found that some 70 to 80 percent of the wealth of the 0.001 percent was in listed securities, which have a daily market value.

He said that property like jewelry and art could be valued through an insurance policy and that insurance companies would report the values to the I.R.S.

But the tax advisers said any attempt to use insurance values for taxation would be challenged in court. The insured value of a piece of jewelry is what it would cost to replace if it is lost or stolen. That is generally higher than what the jewelry is worth.

Professor Zucman has an unorthodox solution for individuals who can’t assign a value to their ownership stake in a private company or who claim they don’t have sufficient liquid assets to pay the wealth tax. They could pay the tax with shares, which the government would sell to determine their value.

“The idea is not for the government to become a shareholder in a private business,” he said. “It’s for the government to immediately sell the shares and create the market that is missing.”

Families would probably balk at this alternative. The whole idea of a private company is to keep it private — or at the least, carefully select the people who can own part of it.

Selling shares could disrupt how these families run their businesses. Additionally, Mr. Feldman said, families whose wealth is tied up in real estate “struggle to pay the estate tax upon death because of so many illiquid assets.”

Of course, these same families are able to borrow against their real estate to, well, buy more real estate. Presumably they could borrow to pay their taxes as well; they just may not want to.

But valuing privately held companies — the issue that opponents to a wealth tax frequently raise — also presents a question of fairness. After all, the person with real estate holdings or a private business is relying on someone else to value it, while the person with easier-to-value assets like securities is paying an exact amount.

“What’s close enough?” Mr. Pollingue asked. “Would it be fair to make the people with liquid assets pay accurately, and the nonliquid people to pay an estimate? You know the nonliquid estimate would be far lower.”

Professor Zucman said given the relatively small number of people who would be subject to a wealth tax — about 75,000 families — the I.R.S. could hire more inspectors. And those extra employees would be worth the cost: One estimate put Mr. Gates’s wealth tax bill at $6.379 billion next year.



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