The biggest problem I see with a wealth tax

Published on Nov 26, 2019

Last update: Dec 13, 2019

Setting the record straight

Before I bash the idea of a wealth tax in the US, I want to clarify that I’m all for increasing taxes, especially on the wealthy. I’d also like to set the record straight that I’m not anywhere close to being rich enough for the wealth taxes proposed by Warren and Sanders to affect me.

With that said…

The top 0.01% don’t have enough cash to pay proposed wealth taxes

Sure, Jeff Bezos is worth $110B. But I think it’s important to realize that probably 95% of that is tied up in Amazon stock and most of the other 5% is invested in various private companies. In other words, Bezos cash position is likely very small relative to his wealth.

If you take a 4-8% annual wealth tax and apply it to Bezos, that’s $4.5-9B in taxes.

That means Bezos would have to sell Amazon stock to pay his taxes. And he’d continue to have to do this each year, watching his share of the company dwindle.

I personally wonder if this is good for the economy and world? As Bezos’s shares of Amazon decreased, so would his control of the company. And that control would likely end up in the hands of Fidelity, Charles Schwab, or Black Rock, who would own the shares on behalf of their customers via index funds.

If Amazon stock goes up 8% per year for the next decade, Bezos would remain just as rich, but his share and control of the company would decrease by >40%.

Even if you’re of the mindset that Amazon is an evil company that underpays its non-technical staff and is destroying the environment, I think it’s hard to argue against the fact that Bezos has created enormous economic benefit for its shareholders, employees, customers, the US as a country, and the world. Are there things they could do better and more fairly? For sure. But I think the cons outweigh the pros when we start talking about taking innovative control away from one of the best innovators in the world.

Cash isn’t just a problem for multi-billionaires

Under proposed wealth tax plans, anyone with net assets over $30M would likely pay some form of a wealth tax. I know that $30M sounds like a lot of money, and for sure it’s more than the vast majority of Americans will ever see, but there are tens of thousands of small businesses in the US that could likely be valued large enough to put the people who own them above the $30M threshold.

The same cash problem Bezos would have would also exist for tens of thousands of families who own roofing companies in North Carolina, Port-o-potty companies in Florida, custom swimming pool companies in Hawaii, and concrete companies in Colorado.

The owners of businesses of this size usually have the vast majority of their wealth tied up in the company. Even if you could figure out a system for the government to fairly value private companies (seems expensive and subjective), it would be difficult for most of the owners to pay their wealth tax. They won’t have the option to sell 4% of their company on a public exchange. Many would likely be forced to sell the entire company to a private equity firm in order to feel financially secure.

That doesn’t seem like a good idea to me, either.

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