Valuating assets for a wealth tax is impossible and fails in implementation – The IRS cannot implement it

Complex Administration Proponents of an annual wealth tax may imagine a system that is simple, broad‐​based, easy to administer, and lucrative for the government. But wealth taxes did not work that way in practice in Europe. Wealth taxes were complex and costly to collect, and they induced substantial avoidance while raising little revenue. One problem is valuing assets. A wealth tax may require taxpayers to report valuations, not just of financial securities and homes, but also of such items as household furnishings, artwork, jewelry, vehicles, boats, life insurance policies, pensions, family businesses, and farm assets.37 Many of these assets have no ready market valuation. Accounting for wealth held in trusts would also be difficult, and for people with nontraded ownership in family businesses, book and market valuations can differ substantially.38 Furthermore, valuations of assets change over time, so a large industry of accountants would be needed to prepare regular valuations for tax returns. Tax law professor Miranda Perry Fleischer finds that an annual wealth tax would be “hobbled by valuation issues.”39 She discusses, for example, the unknown values of closely held businesses, especially those held jointly with multiple sorts of ownership rights. She notes that valuation disputes already bedevil estate tax returns, but wealth tax disputes would be even more contentious because they would come back year after year. And consider that while the IRS handled 12,700 estate tax returns in 2017, Elizabeth Warren’s proposed wealth tax would require annual filing by at least 75,000 taxpayers.40 In a recent survey of economists, 73 percent agreed and only 7 percent disagreed that Senator Warren’s wealth tax would be “much more difficult to enforce than existing federal taxes because of difficulties of valuation.”41 The difficulty of wealth valuation can be seen in an Internal Revenue Service study that compared valuations on estate tax returns to valuations of the same estates on the Forbes 400 list of wealthiest Americans.42 The study found that estate tax valuations were, on average, only 50 percent of the valuations on the Forbes list: This research highlights the inherent difficulties of valuing assets which are not highly liquid. The portfolios of very wealthy individuals are made up of highly unique assets and often the value of assets, such as businesses, are very closely tied to the personality and skills of the owner. Determining a precise value for these assets can involve more art than science.43 The United Kingdom undertook a major examination of its tax system in 2001 called the Mirrlees Review. It studied a possible UK wealth tax and concluded: Levying a tax on the stock of wealth is not appealing. To limit avoidance and distortions to the way that wealth is held, as well as for reasons of fairness, the base for such a tax would have to be as comprehensive a measure of wealth as possible. But many forms of wealth are difficult or impractical to value, from personal effects and durable goods to future pension rights—not to mention “human capital.” These are very serious practical difficulties. And where attempts have been made to levy a tax on a measure of current wealth—in France, Greece, Norway, and Switzerland, for example—practical experience has not been encouraging.44 Another problem with wealth taxes would be tracking wealth held abroad. A wealth tax could be imposed on just domestic assets, but that would create a large incentive for the wealthy to hold their assets abroad. So, Congress would likely impose the tax on worldwide assets, yet that would create a large incentive for evasion. The Internal Revenue Service would be charged with the impossible task of auditing everything affected U.S. residents owned on a global basis and judging whether the valuations on all those foreign assets were fair. Taxpayer liquidity would be another issue. Wealth tax payment would be difficult for people who mainly held assets that are illiquid and do not generate regular cashflows, such as homes, artwork, and ownership shares of some family businesses. The need to pay wealth taxes each year would force inefficient sales of assets to raise cash or require taxpayers to borrow money. The OECD found that liquidity issues have been a major problem with wealth taxes in Europe.45 In the 1970s, the British Labour Party campaigned on imposing an annual wealth tax, and it tried to follow through after being elected. However, party leaders eventually dropped the idea when they realized how complex the administration would be. The Chancellor of the Exchequer at the time, Denis Healey, said in his memoirs, “We had committed ourselves to a wealth tax; but in five years I found it impossible to draft one which would yield enough revenue to be worth the administrative cost and political hassle.”46 India enacted an annual wealth tax in 1957 and repealed it in 2015. Indian finance minister Arun Jaitely described reasons for his government’s scrapping of the tax at an event in New York: “The practical experience has been it’s a high cost and a low yield tax.”47 The Indian wealth tax became riddled with exemptions, it was evaded, and it raised little revenue.48 An expert study for the Mirrlees Review concluded that the wealth tax in Europe “has been a particularly inefficient tax to collect,” and that for the UK it would be “costly to administer, might raise little revenue, and could operate unfairly and inefficiently.”49 An International Monetary Fund (IMF) study concluded that “taxing income from wealth, rather than taxing wealth itself, is more equitable and efficient.”50 For the United States, a wealth tax would not achieve the fairness that supporters are seeking. It would generate tax avoidance and lobbying by the wealthy for exemptions. In turn, that would increase public cynicism about the tax system. In countries that have had wealth taxes, the public has not perceived the actual operation to be fair. In its study, the OECD concluded, “A major concern with net wealth taxes is the ability of wealthier taxpayers to avoid or evade the tax. This has limited the potential of net wealth taxes to achieve their redistributive objectives and has contributed to perceptions of unfairness.”51 Economist Asa Hansson studied European wealth taxes and found that they often resulted in “poisoning general tax morale” because of the exemptions provided and the widespread avoidance.52 The OECD reports that “wealth taxes were unpopular in a number of countries, which contributed to their repeal.”53