Friday, October 14, 2011

Taxing Wealth, High Income, or....What?

The Wall Street Journal published an interesting editorial recently discussing the tax consequences of someone who realizes a large gain in the last year of his moderately-high income working life. The writer's point was that a one-time, larger-than-$250K income makes an otherwise-middle income person look 'rich' by the standards of today's arguments over tax rates and income levels.

This caused me to think of the larger picture, i.e., income versus net asset wealth.

To hear politicians from both parties these days, there seems to be confusion over what constitutes 'wealthy' or 'rich' people. Is it a net asset value, or an AGI level?

It matters. And causes me to wonder if this confusion affects taxation policy.

Currently, one's wealth is taxed when it was income. If earned, it's taxed each year it has been earned. If inherited, it is the detritus of the rather sizable haircut given by a dead benefactor's death taxes.

The current tax code has many provisions which reduce notional rates. If a person who, in the past, earned a lot of money, and has become an owner of substantial assets, uses tax code provisions to reduce his/her current income tax liability and rate, s/he is viewed as doing something immoral, if not illegal.

You have people like Warren Buffett and Jim Chanos publicly declaring their willingness to pay more tax on their income. Chanos went even further, claiming that, contrary to what economists predict, he would change nothing about his work life, work just as hard, even if he knew that the federal government would take a larger share of each year's income.

I thought about those two very wealthy businessmen, and what would motivate them to so publicly endorse the idea that they should pay more in taxes.

Aside from purely political persuasion, one is pretty much forced to believe that only people who had amassed so much wealth that current income really doesn't matter anymore would say things like they say.

Particularly Chanos. I'm not intimately familiar with any large windfall income years from his hedge fund management, but I have the general sense that he's worth hundreds of millions of dollars, or more.

I've written in prior posts about GE's Jeff Immelt, who has, as a matter of public record, already earned in excess of $20MM in cash during the past decade that he has been that firm's CEO. I contended that, once someone has been paid that much money, and hasn't simply pissed the bulk of it away, they are no longer motivated by future earnings. So when Immelt makes it a point to publicly claim that his current or future incentive payments will be more difficult to earn, I pay no attention. At this point, it's unlikely his lifestyle would change much if he earned those bonuses, or became a dollar a year man, like the late Steve Jobs, the recently-deceased CEO of Apple.

How do you suppose people like Chanos and Buffett would react if Congress announced that it was considering amending the tax code to require payment of, say, 2% of net worth from any tax filer with a net worth over $1MM?

Perhaps the law would simply change the basis of tax once one amasses a net worth of $1MM, including real estate. That would certainly address the issue of "the rich" paying "their fair share," wouldn't it? In effect, for wealthy Americans, federal tax would become a property tax, not an income tax.

Perhaps it would be scaled, like the income tax, so that above certain net worth levels, one paid multiples of the 2% of net worth.

After all, if it's just simple class warfare that the masses want the tax code to address, isn't a federal property tax on the very wealthy simpler to understand and apply?

Isn't net worth what most people mean when they say someone is "rich?" I don't really think that someone who, for one or two years, earns a lot of money, is seen, per se, as "wealthy." Unless perhaps it's a trader whose compensation for a few years is in the tens of millions, like Howie Hubler at Morgan Stanley, or Wing Chau at Harding Advisory. But, in those cases, someone's one or two year income pushes them right into the very wealthy group that would be subject to the federal property tax.

I don't really have firm answers for these questions. Rather, it simply occurred to me that if people are really out to "soak the rich" with taxes, shouldn't they be more clear about what they mean by "rich?"

And if they mean high net worth, then why not just tax that directly, rather than the income of people with high net worth?

Of course, it's quite possible that many so-called limousine liberals might change their mind about endorsing higher taxes on the wealthy if it applied to their net worth, rather than their annual incomes, isn't it?

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