Someone (not me) once had the idea of a huge, one-time tax on the net worth of rich people to pay off the national debt in one fell swoop. At the time, based on one definition of “rich,” it would have meant confiscating about 15% of a typical wealthy person’s assets. Let’s say that figure is closer to 25% now, just for argument sake.
For political reasons, this sort of plan would never work. But I’m fascinated by the question of whether it would make sense from a financial perspective. If you offered me a chance to live in a fiscally reinvigorated United States with no national debt, and in return I had to give up 25% of my current assets, I think I might take that deal, with a few safeguards.
The first safeguard I’d need is some sort of constitutional amendment that makes it illegal for the government to spend more than it takes in. I’d also want a constitutional amendment making it illegal to raise income tax rates from current levels. Without those protections in place, the rich would literally leave the country before considering such a deal.
In the world of personal finance, every expert agrees that an individual should pay off all credit card debt before considering any other investments. But credit cards have high interest rates compared to the national debt, so that comparison doesn’t work. The real benefit of paying off the national debt is that it would have an enormous psychological impact on the economy and free up the money that had been going to interest payments. The typical rich person’s investments would probably grow faster under that scenario and end up recovering the cost of the one-time tax in five years. Higher income taxes, by comparison, are not going to stimulate the economy.
The biggest obstacle to this sort of wealth confiscation plan is that the rich would hide assets in order to reduce their one-time tax burden. I think that problem is a big one, but remember that the rich are a limited population and you could audit just about every one of them. And every rich person who had a loan or a line of credit probably has a current balance sheet with a bank. Hiding assets would be risky business.
There would also be a liquidity problem for many of the wealthy. It’s not easy to come up with that much cash all at once. So perhaps the “one-time” tax could be paid over five years. That’s five percent of your assets per year, and probably doable. You’d still need some sort of regulatory body to make decisions when a particular rich person isn’t in a position to generate enough liquidity. But all of this seems feasible, barely.
I already know you don’t like this idea. It sounds more like government-sanctioned robbery than taxation. And I can’t make the idea any more palatable by telling you that the idea was floated by Donald Trump during a past presidential cycle. We can all agree that the idea is both distasteful and impractical in our current political system. The only question that interests me is whether the rich, and everyone else, would come out ahead under such a plan. Perhaps such a plan would remove so much investment cash from the wealthy that it would strangle the system.
What do you think? Remember that you have to compare this plan to whatever plan you think is second best.