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May 26, 2014

Thomas Piketty’s wealth tax would be an administrative nightmare

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Thomas Piketty’s best-selling treatise “Capital in the 21st Century” elates liberals because it argues on behalf of soaking the rich with excessive taxation. Mr. Piketty’s preferred mechanism for equalizing incomes is to institute a global tax on wealth.

But there’s a drawback to Mr. Piketty’s wealth tax: It would tank the world’s economy. It would reduce economic inequality by making us all equally poor.

But let’s assume for the moment that Congress decided to pass a wealth tax anyway. Here we encounter another problem. Administering this tax would be extremely difficult. And recent administrative failures suggest that our government isn’t up to handling a challenge of such magnitude.

Mr. Piketty’s questionable central argument (which has been rebutted by well-known economists including Kevin Hassett of the American Enterprise Institute and Harvard’s Lawrence Summers) is that economic inequality is fated to explode in the coming years because income from wealth for the already wealthy will increase faster than will income from work for the rest. In the French economist’s mind, the wealth tax is necessary to prevent that occurrence.

The closest thing we have to a wealth tax is the estate tax, which applies to few people and only at death.

His wealth tax would be an annual progressive tax on all wealth. Assuming a broad wealth tax could pass constitutional muster (also highly questionable), such a tax would require the government to compile a detailed list of all the assets of every person in the country.

Such assets would include cash, stocks, bonds, life insurance policies, retirement accounts, housing, vehicles, appliances, furnishings, jewelry and lots of other stuff people own.

Financial wealth could be accounted for relatively easily, since financial companies accurately keep those records. But a detailed account of everything else we own would require a massive amount of work, possibly including an intrusive home inspection by government officials to inventory our valuables.

The government would then have to assign a value to those possessions and update the list regularly because people buy and sell things all the time and items change in value.

The process would look much like the process municipal governments go through yearly to administer their real estate property taxes. Those assessments are always highly contentious. Wealth-taxing feds would have to do the same thing — for all types of property, not just real estate.

Given its recent woes implementing Obamacare, there is no reason to believe government could pull off this much more daunting task competently.

Even if it could compile the list, privacy would be a major concern. The IRS would likely administer the tax. The agency’s recent scandal involving political targeting of conservative groups raises tremendous concern over its trustworthiness in handling sensitive information.

The ostensible purpose of a wealth tax would be to reduce inequality by both lowering the incomes the rich receive from their wealth, and redistributing that revenue to those with lower incomes. But the government is having significant problems administering existing redistribution programs.

A report just this month from the Treasury Department’s inspector general found that a quarter of the payments from the earned income tax credit, a program that rightly enjoys strong bipartisan support, were wrongly issued. These erroneous payments cost taxpayers upwards of $15 billion in 2013.

Another report indicates that a million Obamacare enrollees have received inappropriate subsidies in just the first few months of operation. Many of the erroneous subsidies are overpayments.

Similar problems would likely plague a new redistribution program using the money from the wealth tax, costing taxpayers additional billions in incorrect payments.

Even if it could work efficiently, tearing down those at the top and distributing the spoils to the rest with a wealth tax will ultimately cause the economy to crumble, leaving all of us worse off.

Far better to lift up those at the bottom through stronger economic growth. A growing economy helps everyone — and doesn’t impose an administrative nightmare to get the job done.

 - Curtis Dubay specializes in tax and economic issues for The Heritage Foundation’s Roe Institute of Economic Policy Studies.

Originally appeared in The Washington Times

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