Wealth taxes prevent entrepreneurs from making their companies public, causing economic decline

A Wealth Tax Would Not Raise Much Revenue but Would Create Distortion. The U.S. faces historic deficits, and the federal government’s debt-to-GDP ratio is predicted to exceed 100% next year. This most likely means that, eventually, taxes must increase to pay some of the debt, especially if interest rates increase. Wealth taxes, however, are not a good way to raise revenue. All taxes alter people’s behavior, and the distortions they create can be harmful. Capital does not go toward its more productive uses; and distorting the returns from risk often yields unintended consequences. Income- and consumption-tax rates have to be quite high in order to discourage work or spending because it is hard to avoid these taxes.[12] Wealth taxes, however, are considered to introduce more distortions than any others. Even at low rates, they discourage saving and investment because they lower the return on these activities.[13] A 2% wealth tax may sound small. Senator Warren points out that it is only 2 cents on every dollar of wealth.[14] But it will be levied each year, so it is more instructive to think of it as a tax on capital income. And when you put the tax in income terms, 2% can be enormous. For example, if your assets return 4%, a 2% wealth tax is equivalent to a 50% tax on capital income! Thus, it is not surprising that wealth taxes increase the incentive to move assets abroad, as European nations have experienced. Unlike income, wealth is relatively easy to move and its value is relatively easy to manipulate. We already see significant distortions that exist in the taxation of estates. Quirks in the tax code that determine how tax liabilities are valued on estates lead to delays in when people sell assets, changes in how they value assets, and even changes to when people die. One paper[15] estimates that death rates changed slightly around the time when there were changes in the tax code that would affect tax liability, though some of the effects may come from when deaths are reported. Another, more common, distortion, is the stepped-up basis. It means that tax liability is based on capital appreciation from when the assets were bequeathed to when they were sold. Normally, capital-gains taxes are based on the growth in value from when an asset was originally purchased. Estate-tax rules encourage some to hold assets until their death that they would otherwise have sold earlier. Holding these assets will reduce the intergenerational tax burden.[16] This distorts asset markets, and the estate tax is only a one-time tax levied after death. An annual tax would create more distortions that could even worsen inequality. A wealth tax creates an incentive to keep companies private and not sell shares on the stock market, because that makes wealth easier to underreport, which lowers the tax burden. There are numerous examples of private wealth being unreliable and difficult to value. Take the Forbes list of richest Americans,[17] which, according to one study, is completely out of step with estate-tax data.[18] One example was the great fanfare around the report that Kylie Jenner, a reality-show and makeup mogul, was a billionaire and appeared on the Forbes list. Later it was revealed that she was indeed very wealthy but not a billionaire.[19] Her case demonstrates how easy it is to misstate wealth when a company’s shares are not sold on the open market. A wealth tax creates an incentive for entrepreneurs not to take their companies public—which means that the American public cannot share in the growth of the most productive firms. This reduces wealth creation within the broader economy.