In most states we are accustomed to taxes on assets, but in some states, taxes on property are so punitive that they lead many taxpayers to consider relocating to a less hostile state. State income taxes may add even stronger reasons to migrate. For example, the state income tax rates imposed on long term capital gains are 13.3% in California, 10.75% in New Jersey, 9.9% in Oregon, and 9.85% in Minnesota. Combined with high property taxes, some states are loudly urging the rich to go away.
The median annual property tax rate in New Jersey is 1.89%, highest in the nation. Median property taxes in NH, TX, IL, WI and NE each exceed 1.7%. When high tax rates are applied to homes that are already high in price, the property tax burden can be oppressive.
Vehicle taxes vary between 2% and 8% for the state portion, and usually are made higher by additional county and city tax imposed on the vehicle. Arizona and South Carolina levy an annual vehicle tax in the 5% range. Indiana, Connecticut, and California impose a tax in the 7% range. In Denver, Colorado, the vehicle tax is 8.31% including state, county, and local components. In a few states, the tax is graduated to be higher for heavy or more expensive automobiles.
Now, a few progressive pundits are urging the imposition of a radically higher federal income tax, and in some cases, a tax on wealth. Alexandria Ocasio-Cortez (AOC) wants a federal marginal tax rate that tapers up to a 70% rate for earnings above $10 million. The notional extra taxes collected would be used to fund her Green New Deal. The U.S. Senate did not proceed to debating the Green New Deal as 57 senators voted against it and nearly all of the remaining 43 voted “present,” a cynical ploy to avoid being on the record as a supporter or opponent.
Senator Ron Wyden proposes that unrealized capital gains should be taxed annually. He sees it as a way to reduce income inequality. But his plan amounts to an annual tax on assets, not just on income. That tax on wealth would be levied at ordinary income rates, i.e. at as much as 37%. The result would dissipate a $100,000,000 accumulation of wealth by 99.8% after 12 years.
Plans like Wyden’s would deplete a primary source of capital needed to fuel economic growth and to create jobs.
Senator Elizabeth Warren proposes a wealth tax that would be 2% applied to those with assets above $50 million and 3% to those with $1 billion or more in assets. Warren’s plan to chastise the rich would come with safeguards such as “an exit tax equal to 40 percent of total wealth for those who relinquish their American citizenship.” Senator Bernie Sanders favors a plan that levies between 45% and 55% for estates below $1 billion and a straight 77% for estates above $1 billion. The Sanders approach would increase the depletion of investment capital, making it more costly to invest in new productive assets.
There are two schools of thought on reducing the disparity between high incomes and low incomes. Rep. Alexandria Cortez, Sen. Ron Wyden, Sen. Elizabeth Warren, and Sen. Bernie Sanders seem to think that the best approach is to punish the wealthy by gathering aggressive taxes to spend on programs that politicians like themselves think are suitable.
Others take a longer view that includes building poor families’ capacity to earn higher incomes. That can be accomplished through better social programs in education, health care for children, housing supplements, smarter approaches to incarceration, and stronger enforcement of child support obligations. Funding social programs like these will help families earn more income and will equip children to qualify for better paying jobs.
A vibrant economy needs pools of investment capital to support plentiful jobs and equipment that fosters higher labor productivity. We believe that increasing government income to support social programs is best accomplished through the vibrant economy.
Taxation of wealth has not worked well in Europe. “More than a dozen European countries used to have wealth taxes, but nearly all of these countries repealed them,” leaving just Norway, Spain, and Switzerland marginally reliant on wealth tax. The wealth taxes raised about 0.2% of GDP but were exceedingly difficult to administer and enforce. As expected, those targeted would do their best to lobby against or evade the taxes. We can expect a similar reaction in the U.S.