A recent op-ed column in Real Clear Politics by Scott Hodge, president of the national Tax Foundation (not related to the Tax Foundation of Hawaii although the names are similar) brought up some interesting ideas, spurred by the announced plans of Democratic presidential candidates Elizabeth Warren and Bernie Sanders to enact a tax on wealth.
Sen. Warren’s wealth tax would tax 2% of every dollar of net worth above $50 million, or 3% for every dollar above $1 billion. Sen. Sanders would levy 1% on net worth above $32 million, and the percentage would progress with greater wealth until it reaches 8%, which would apply to net worth above $10 billion.
With a state legislative session upcoming and lawmakers hungry for more revenue, a wealth tax may come up for debate locally as well.
So why a tax on wealth?
The tax system is supposed to be a means of distributing the cost of government among the governed. In this country the primary means of doing that is our income tax system. If you earn money, you pay back some of it as tax. The system is progressive, which means that if you earn more money, you pay proportionately more tax.
Wealth is what remains after someone has earned money and the income tax system has taken some of it away. A wealth tax system, then, would be a second tax on the same earnings. Because our income tax system already distributes the cost of government, there must be a different rationale for a wealth tax.
The rationale: Wealth is a sin.
In our tax system here in Hawaii and in most states, we impose a tax on socially undesirable things in order to motivate people to use less of them. Examples of these “sin taxes” are taxes on fossil fuel, tobacco products, and liquor. The theory behind these levies is that the targeted behavior causes the government to spend more money to deal with the behavior, so the perpetrators of the behavior should pay for those extra costs. The English economist Arthur Pigou developed many of the key ideas behind the economic theory, and sin taxes are sometimes called “Pigovian taxes.”
Do the wealthy cause government to spend money to deal with them, so that it is fair to ask them to pay for those extra services? Maybe certain of them have eccentricities that are tough to deal with – Japanese property tycoon Genshiro Kawamoto comes to mind – but there is no common thread linking wealth with social ills as there is, for example, with fossil fuels and air pollution.
Is being wealthy socially undesirable? It probably depends on who you ask and the context of the question. Political ideology weighs heavily here – for example, Sen. Sanders once said that he did not believe billionaires should exist in the United States. He is an avowed socialist. Here in Hawaii, much of the political rhetoric over the past few years has focused on the wealthy and their impact on the housing market. They buy here but they don’t live here, creating fewer opportunities for the locals to own a piece of the rock. That theme emerged often in the debates over the proposed constitutional amendment to surcharge real property tax for K-12 education.
Then, there is the issue of whether the cure would cause more harm than the alleged disease. Lawrence Summers, a former Treasury Secretary, argued in an article published in the Boston Globe that wealth taxes would sap innovation by putting new burdens on start-up businesses, “undermine business confidence, reduce investment, degrade economic efficiency and punish success in ways unlikely to be good for the country.”
We should be very careful to evaluate the potential consequences of a tax on wealth before we create and feed such a beast here in Hawaii.
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Tom Yamachika is the President of the Tax Foundation of Hawaii, a private, nonprofit educational organization dedicated to informing the taxpaying public about the finances of our state and local governments in Hawaii. Tom is also a tax attorney in solo practice and has been since early 2013. Prior to 2013, he was with the accounting firm Accuity LLP, which was formed in 2006 from the Honolulu office of Coopers & Lybrand (which later became PricewaterhouseCoopers). Before that, he served as an Administrative Rules Specialist in the State of Hawaii Department of Taxation from 1994 to 1996, where he drafted rules, interpretive releases, and legislation on several different state taxes. Prior to that, he practiced litigation and tax law with Cades Schutte Fleming & Wright in Honolulu.