Critics of wealth tax are bad faith exaggerations-market valuation and in kind payment fixes every problem

(Emmanuel, E. Morris Cox Professor of Economics and Director of the Center for Equitable Growth at the University of California, Berkeley and Gabriel, Assistant Professor of Economics at the University of California, Berkeley https://www.bostonreview.net/forum/gabriel-zucman-taxing-superrich/ , 3-17)

A progressive wealth tax is possible because wealth is well defined at the very top, in contrast to realized income, which can be artificially reduced. Wealth is defined as the market value of one’s assets net of all debts. The taxable income Buffett reports to the Internal Revenue Service is a tiny amount of his true economic income; he is worth more than $50 billion. With a wealth tax at a rate of 3 percent for fortunes above $1 billion, Buffett would pay more than $1.5 billion a year.Not all forms of wealth are as easy to value as Buffett’s shares in Berkshire Hathaway, and this has been a concern for critics of a wealth tax who believe it would be impossible to implement fairly. (A publicly traded company such as Berkshire Hathaway has a well-defined market value; because Buffett’s wealth is fully invested in Berkshire Hathaway shares, it is easy to tax him. But the affluent can also own shares in unlisted (also called private or closely held) businesses. Other forms of wealth—such as art or jewelry—are sometimes hard to value, too. But these concerns—as well as the claim that wealth taxation failed in many European states, so they must fail here—are often exaggerated. The valuation problems can be addressed, if there is political will to address them. Here’s how. Modern capitalist economies such as the United States have well defined property rights and put value on most assets. Around 70 percent of the wealth owned by the top 0.1 percent richest Americans consists of listed equities, bonds, shares in collective investment funds, real estate, and other assets with easily accessible market values. For the remaining 30 percent—mostly shares in private businesses—valuation raises fewer problems than you might think. In the first place, shares in large private businesses—though not publicly listed—are regularly bought and sold. Even before Lyft and Uber went public in 2019, for instance, people could invest in the ride-sharing service companies. Private companies regularly issue new stock to banks, venture capitalists, wealthy individuals, and other “accredited investors” with sufficiently deep pockets. These transactions put a de facto value on private firms. In some cases, however, no transactions take place for years, especially for mature private businesses controlled by a small number of owners. For example, 90 percent of the agribusiness giant Cargill, the largest private company in the United States, is owned by 125 or so members of the Cargill and MacMillan families. Cargill shares were last transacted in 1992, when 17 percent of the company’s shares were sold for $700 million—thus valuing the entire firm at a bit more than $4 billion. Here is a striking case where taxing wealth might seem hopeless. What is the value of Cargill today, almost thirty years after this last share transaction? Isn’t any estimate fraught with countless risks of abuse? But in fact, taxing the Cargills and the MacMillans equitably is not impossible. To start with, the tax administration can take the 1992 Cargill valuation and update it based on any changes in the company’s profits since then. If the company makes three times more profits today, it is not unreasonable to believe it is worth about three times as much as in 1992. Of course, much more information ought to inform a reliable valuation. What sort of information? Data about Cargill’s direct competitors that are listed as public companies, such as Archer Daniels Midland and Bunge, for example. To better assess Cargill, the IRS can consider how much a dollar of earnings made by these firms is valued by the stock market. It can study how the price-to-earnings ratios of Archer Daniels Midland and Bunge have changed since 1992. Every day, hundreds of financial analysts value private firms in this, and more complex, ways. The United States, with its sophisticated financial markets, has no shortage of expertise in this area. Drawing on standard private sector practices, it would not be terribly complicated for the IRS to come up with a reasonable estimate of Cargill’s market value at the end of each year. But suppose that the MacMillans and Cargills feel cheated by the IRS—they complain that the IRS, out of an interest in generating tax revenue, over-estimates the value of their firm. Perhaps Cargill has fundamentally changed since 1992, in ways that state-of-the-art valuation techniques may fail to capture. Perhaps it has weaknesses that its competitors do not share. What is to be done? The heart of the problem is a missing market: while there is an active, liquid market for Archer Daniels Midland and Bunge shares, no such market exists for Cargill’s stock. The solution to this problem, in our view, is for the government to step in and create the market that is missing. The IRS would give the option to Cargill’s shareholders to pay the wealth tax in kind—with Cargill shares—rather than in cash. If they used this option (which they would do only if they believed the IRS valuation was exaggerated), the tax authority would then sell the shares to the highest bidders on a market open to any and all bidders—venture capitalists, private equity funds, foundations, or other rich families interested in acquiring a stake in the agribusiness giant. This solution addresses the challenge head on. Just as a well-functioning income tax should treat all income equally, a good wealth tax should treat all assets in the same way, at their current market value. If some values are missing, the solution is to create them. And there is nothing better to create a market value than, well, to create a market. For a wealth tax imposed at an average rate of 2 percent, Cargill’s shareholders would hand in 2 percent of their shares each year (or the cash equivalent, if they prefer to retain full control of the company). As with Buffett’s Berkshire Hathaway, there would be no getting away. Transforming Cargill’s shares into cash would be the government’s job. This solution also addresses another frequent objection to wealth taxation—the problem of liquidity. Very rich people may have a lot of wealth and yet not enough income to pay their tax bills. Isn’t it unfair to force them to pay a tax when they don’t have cash in hand? To be frank, liquidity concerns are often put forward in bad faith. The claim that people worth hundreds of millions of dollars may not have enough cash to pay a million dollars in tax does not often withstand scrutiny. If ultrarich individuals say they have little cash, it is usually because they choose to realize little income to avoid the income tax. They organize their own illiquidity. But suppose the liquidity problems are real. The most relevant case might be a highly valued startup that makes no profit. Generating cash each year may turn out to be complicated or costly for anyone whose primary source of wealth is shares in the company, since young firms typically do not pay dividends. In that case, allowing taxpayers to pay in kind—with shares of the companies—addresses the problem. Because the wealth of the rich mostly consists of equity, and equity (in contrast to real estate) can always be divided, it can be used to pay for the tax. If the wealth tax can be paid with assets rather than cash, a progressive wealth tax isn’t harder to implement in practice than a progressive income tax. The middle class already pays taxes on its wealth, in the form of property taxes. The wealthy don’t, since most of their wealth consists of financial assets, which are exempt from the property tax. In the nineteenth century, by contrast, the property taxes of most states fell on all assets, both real and financial. In the beginning of the twentieth century, the United States pioneered the progressive taxation of property with its federal estate tax—now moribund. Before turning its back on this distinguished tradition, the United States was at the forefront of the democratic regulation of property via the tax system.