We Really Need a Wealth Tax

Back on August 26, 2010, I posted an article that merely asked the question, Time For A Wealth Tax?

That brief item mentioned the pros and cons of such a tax and why it was needed to stimulate the economy.

Since that post, I have read Robert Reich’s book, Aftershock: The Next Economy and America’s Future.  It became abundantly clear from reading that book, that the need for the wealth tax extended beyond the need for a temporary stimulus.  The distorted distribution of wealth in this country is what is robbing the economy of enough consumer demand to sustain full employment.  Without the middle class being able to buy all that a full employment economy could produce (minus net exports), there is just no reason for the free market economy to employ all the people who want to work.

Eliminating the Bush tax cuts for the wealthy is a step in the right direction toward eliminating the skewed distribution of wealth.  However, I have come to see that the biggest untapped reservoir of income to be taxed is the very money that we do not now consider to be income.  The wealth of the super rich is growing by far more than the amount that is ever declared as income.

How can wealth of the super rich be growing so much and yet there doesn’t appear to be enough income in the economy to account for it?  The reason is that much of this growth is in unrealized capital gains.  How much of Bill Gates’ 40 odd billions of dollars in wealth was ever classified as income to be considered for taxation and how much is unrealized capital gains? As long as he continues to hold onto his large amount of Microsoft stock, the gain will never be taxed. If he passes this stock on to his children at his death, the stock cost basis will automatically be adjusted to its value on the date of his death.  What was unrealized before is just forgotten in the eyes of the government and will never be taxed.

Unrealized capital gains’ addition to the wealth of the super rich may be unrealized in the technical sense, but the loss of income in the middle-class is definitely being realized.  As I have mentioned above, the heirs can then realize the capital gains and still not pay taxes on it.

So much of the increase in wealth that would be classified as income and therefor taxable if it were being collected by the middle class is shifted to unrealized capital gains when it is accumulated by the wealthy.  So not only are the wealthy paying lower tax rates on the money they do have to declare as income, there is a lot more money that they don’t even have to classify as income.

The citizens are left to wonder why our tax collections aren’t keeping up with the cost of the government services we are voting for ourselves.  Aren’t accounting rules just grand if you can stack them in your favor?

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