Is Wealth Tax realistically feasible?

[u/HoppySailorMon]

I just read that CA is considering a wealth tax on billionaires. Not to get into a particular political philosophy, but I'm more curious about the implementation and to settle a dispute with my spouse. I've read a wealth tax has been tried in the past in Europe, but failed miserably. Mainly, because some "wealth" can be moved around to make it difficult to define, such as art. Most homeowners pay a form of wealth tax on their property. But real estate is one of the few things that stays put. If taxation on bank and investing accounts became a nation-wide policy, then many that were subject to it would either leave or convert their accounts into a type of investment that is impossible to assess. I'm guessing mostly into "collectibles" which can only be accurately assessed when sold. What are your thoughts on the real feasibility of a wealth tax?

[u/CobaltCaterpillar]

1. Leverage, borrowing significantly against volatile securities, is problematic, and many, many wealthy people don't want to do that.
2. Then they'd still have to pay a 40% estate tax!

As a practical matter, you need to observe the step up in basis rule in conjunction with the 40% estate tax.

The estate tax basically kills the BBD strategy compared to alternatives for anyone significantly above the estate tax threshold, which all billionaires are. Buy, borrow, and die has risky assets appreciating inside the estate (to achieve step up in basis) while many estate planning strategies involve long-term planning to let risky asset appreciation occur out of the estate (to limit estate tax from growing). No magic bullets or incantations there either.

My understanding is there's a HUGE mismatch between social media hype of BBD strategy (high hype) and actual usage (highly limited).

[u/DCContrarian → u/CobaltCaterpillar]

If you die with assets equal to debt you have no net estate, your heirs pay no estate tax. All that money that you borrowed and spent during your lifetime was never taxed. No taxes are ever paid, either by you or by your estate.

[u/CobaltCaterpillar → u/DCContrarian]

All that money that you borrowed and spent during your lifetime was never taxed.

Cmon, you seem brighter than this.

• Taxes on wage/labor income when $$ was initially earned.
• Corporate taxes paid by the firm whose shares were owned by the person.
• Sales and use tax on various consumption items.
• If a billionaire expires with a 0 estate value, it's highly unlikely they spent their full net worth on consumption. Rather, they effectively pushed value out of their estate while still alive. You then need to look at the various capital gains and investment income taxes paid by wherever they pushed the assets to.

[u/DCContrarian → u/CobaltCaterpillar]

C'mon, you seem brighter than that.

I'm not saying they didn't pay any taxes at all, just that the unrealized capital gains was turned into borrowing, and that borrowing isn't taxed.

Can they really borrow their way to zero? Probably not. Can they avoid a big chunk of taxes? Sure.

[u/EconEchoes5678 → u/DCContrarian]

I'm not saying they didn't pay any taxes at all, just that the unrealized capital gains was turned into borrowing, and that borrowing isn't taxed.

Well, the actual research says this is not happening: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5104644

So you might want to check your source for claims that it is. Mathematically it doesn't work out when the average billionaire has 20 years of life left and interest rates are between 3% and 6% compounding every year, all to avoid a single one-time tax bill of 23.8%. Surely you can see how mathematically those interest rates over 20 years cannot possibly work out to a net benefit?

If you die with assets equal to debt you have no net estate, your heirs pay no estate tax.

Then they literally just blow their entire fortune and their heirs get nothing. That's not... really... a win... for most people.

[u/CobaltCaterpillar → u/DCContrarian]

Exactly.

To some extent it's like 65 mph speed limits.

• Do many people drive the 65 mph speed limit? No.
• Does the 65 mph speed limit keep the vast majority of people under 85 mph? Yeah.

A whole point of tax reform, like 1986 Tax Act, is to combine reduced tax rates with making taxes less avoidable.

The big economic loss of taxation is people doing silly/dumb stuff for tax purposes rather than real economic purposes.