SLIDE 1 T axing We alth in an Unc e r tain Wor ld
Da nie l He me l
Unive rsity o f Chic a g o L a w Sc ho o l Na tio na l T a x Asso c ia tio n 49th Annua l Spring Sympo sium Ma y 17, 2019
SLIDE 2 We alth T axation
Ob je c tive s
- 1. Re duc e hig h-e nd we a lth ine q ua lity
na rro w/ e limina te r
– g g a p
- 2. Ra ise re ve nue fo r pro visio n o f pub lic
g o o ds/ so c ia l insura nc e
SLIDE 3 We alth T axation
Ne a r-E q uiva le nt Alte rna tive s
- 1. Annua l we a lth ta x
- 2. Ma rk-to -ma rke t inc o me ta x
- 3. Re tro spe c tive c a pita l g a ins ta x
SLIDE 4
We alth T axation
Ne a r-E q uiva le nt Alte rna tive s
1. Annual we alth tax
SLIDE 5
We alth T axation
Ne a r-E q uiva le nt Alte rna tive s
1. Annual we alth tax
Assume r
= 5%
SLIDE 6
We alth T axation
Ne a r-E q uiva le nt Alte rna tive s
1. Annual we alth tax
Assume r
= 5%
L
e vy tax of 1% of ne t wor th on Jan. 1, 2019
SLIDE 7
We alth T axation
Ne a r-E q uiva le nt Alte rna tive s
1. Annual we alth tax
Assume r
= 5%
L
e vy tax of 1% of ne t wor th on Jan. 1, 2019
Star
ting we alth: $100
We alth on Jan. 1, 2019: $99 We alth on De c . 31, 2019: $99 x 1.05 = $103.95 We alth on Jan. 1, 2020: $103.95 x 0.99 ≈ $102.91 We alth on De c . 31, 2020: $102.91 x 1.05 ≈ $108.06
SLIDE 8
We alth T axation
Ne a r-E q uiva le nt Alte rna tive s
2. Mar k- to- mar ke t inc ome tax
Levy tax of 21% on ∆net worth
SLIDE 9
We alth T axation
Ne a r-E q uiva le nt Alte rna tive s
2. Mar k- to- mar ke t inc ome tax
Levy tax of 21% on ∆net worth Star
ting we alth: $100
We alth on De c . 31, 2019: $100 x 1.05 x (1 – 0.21) =
$103.95
We alth on De c . 31, 2020: $103.95 x 1.05 x (1 –
0.21) ≈ $108.06
SLIDE 10 We alth T axation
Ne a r-E q uiva le nt Alte rna tive s
3. Re tr
- spe c tive c apital gains tax
SLIDE 11 We alth T axation
Ne a r-E q uiva le nt Alte rna tive s
3. Re tr
- spe c tive c apital gains tax
Ste p 1: De te rmine amount r
e alize d at time of sale
(As) a nd holding pe r
iod (s)
Ste p 2: Assume g ro wth a t ra te o f r o ve r ho lding
pe rio d
Ste p 3: L
e vy ta x suc h tha t individua l is a s we ll o ff a s she wo uld ha ve b e e n if she ha d sta rte d with we a lth o f As/ (1 + r
)s a nd pa id ma rk-to -ma rke t ta x
SLIDE 12 We alth T axation
Ne a r-E q uiva le nt Alte rna tive s
3. Re tr
- spe c tive c apital gains tax
F
mula: T
s = (1-((1+r(1-t))/ (1+r))s)As
SLIDE 13 We alth T axation
Ne a r-E q uiva le nt Alte rna tive s
3. Re tr
- spe c tive c apital gains tax
F
mula: T
s = (1-((1+r(1-t))/ (1+r))s)As
What happe ns to a taxpaye r
who pur c hase s $100 asse t on Jan. 1, 2019 and winds up with asse t wor th $100 x 1.052 = $110.25 on De c . 31, 2020?
SLIDE 14 We alth T axation
Ne a r-E q uiva le nt Alte rna tive s
3. Re tr
- spe c tive c apital gains tax
F
mula: T
s = (1-((1+.05(1-.21))/ (1+.05))2)110.25
What happe ns to a taxpaye r
who pur c hase s $100 asse t on Jan. 1, 2019 and winds up with asse t wor th $100 x 1.052 = $110.25 on De c . 31, 2020?
SLIDE 15 We alth T axation
Ne a r-E q uiva le nt Alte rna tive s
3. Re tr
- spe c tive c apital gains tax
F
mula: T
s = (1-((1+.05(1-.21))/ (1+.05))2)110.25
What happe ns to a taxpaye r
who pur c hase s $100 asse t on Jan. 1, 2019 and winds up with asse t wor th $100 x 1.052 = $110.25 on De c . 31, 2020?
T
s ≈ $2.19
We alth on De c . 31, 2020 = $110.25 – $2.19 = $108.06
SLIDE 16
We alth T axation
No ne q uiva le nc e s
SLIDE 17
We alth T axation
No ne q uiva le nc e s
1. Abnor mal r e tur ns (e .g ., e ntre pre ne uria l la b o r)
T
a xe d mo re he a vily unde r a ma rk-to -ma rke t inc o me ta x tha n unde r a n a nnua l we a lth ta x o r a re tro spe c tive c a pita l g a ins ta x
SLIDE 18
We alth T axation
No ne q uiva le nc e s
1. Abnor mal r e tur ns (e .g ., e ntre pre ne uria l la b o r)
T
a xe d mo re he a vily unde r a ma rk-to -ma rke t inc o me ta x tha n unde r a n a nnua l we a lth ta x o r a re tro spe c tive c a pita l g a ins ta x
Nor
mative implic ations?
SLIDE 19
We alth T axation
No ne q uiva le nc e s
1. Abnor mal r e tur ns (e .g ., e ntre pre ne uria l la b o r)
Nor
mative implic ations?
Vie w 1: Arg ume nt in fa vo r o f a ma rk-to -ma rke t
inc o me ta x b e c a use : a ) hig h-e nd la b o r ine q ua lity is sig nific a nt c o ntrib uto r to o ve ra ll ine q ua lity b ) unde rta xa tio n o f e ntre pre ne uria l la b o r le a ds to a llo c a tive ine ffic ie nc ie s
SLIDE 20
SLIDE 21 We alth T axation
No ne q uiva le nc e s
1. Abnor mal r e tur ns (e .g ., e ntre pre ne uria l la b o r)
Nor
mative implic ations?
Vie w 2: Arg ume nt in fa vo r o f a nnua l we a lth ta x
- r re tro spe c tive c a pita l g a ins ta x b e c a use :
a ) hig h-e nd la b o r ine q ua lity is le ss
- b je c tio na b le tha n we a lth ine q ua litie s tha t
a c c umula te o ve r g e ne ra tio ns b ) unde rta xa tio n o f a b no rma l re turns re wa rds po sitive e xte rna litie s fro m e ntre pre ne uria l la b o r (Jo ne s, 2019)
SLIDE 22 We alth T axation
No ne q uiva le nc e s
1. Abnor mal r e tur ns (e .g ., e ntre pre ne uria l la b o r)
Nor
mative implic ations?
Vie w 3: Ne ithe r a n a rg ume nt in fa vo r o f ma rk-
to -ma rke t inc o me ta x no r a n a rg ume nt in fa vo r
- f a nnua l we a lth ta x o r re tro spe c tive c a pita l
g a ins ta x b e c a use we ha ve lo ts o f o the r to o ls to ta x a b no rma l re turns (e .g ., c o nsumptio n ta x)
SLIDE 23 We alth T axation
No ne q uiva le nc e s
1. Abnor mal r e tur ns (e .g ., e ntre pre ne uria l la b o r)
Nor
mative implic ations?
Vie w 3: Ne ithe r a n a rg ume nt in fa vo r o f ma rk-
to -ma rke t inc o me ta x no r a n a rg ume nt in fa vo r
- f a nnua l we a lth ta x o r re tro spe c tive c a pita l
g a ins ta x b e c a use we ha ve lo ts o f o the r to o ls to ta x a b no rma l re turns (e .g ., c o nsumptio n ta x)
Note : Also po ssib le to inte g ra te ta x o n
a b no rma l re turns into re tro spe c tive c a pita l g a ins ta x (Aue rb a c h & Bra dfo rd, 2004)
SLIDE 24
We alth T axation
No ne q uiva le nc e s
1. Abnor mal r e tur ns (e .g ., e ntre pre ne uria l la b o r) 2. Alloc ation of r isk
SLIDE 25
We alth T axation
No ne q uiva le nc e s
1. Abnor mal r e tur ns (e .g ., e ntre pre ne uria l la b o r) 2. Alloc ation of r isk
Domar and Musgr
ave (1944): I
nc o me ta x with full lo ss o ffse ts impo se s no b urde n o n priva te risk- ta king if ta xpa ye rs c a n b o rro w a t risk-fre e ra te a nd risky a sse ts a re unlimite d in supply
SLIDE 26
We alth T axation
No ne q uiva le nc e s
1. Abnor mal r e tur ns (e .g ., e ntre pre ne uria l la b o r) 2. Alloc ation of r isk
Kaplow (1994): Ab se nt a djustme nts, we a lth a nd
inc o me ta xe s will diffe r in the ir implic a tio ns fo r the g o ve rnme nt’ s inve stme nt po rtfo lio
SLIDE 27
We alth T axation
No ne q uiva le nc e s
1. Abnor mal r e tur ns (e .g ., e ntre pre ne uria l la b o r) 2. Alloc ation of r isk
Nor
mative implic ations?
SLIDE 28
We alth T axation
No ne q uiva le nc e s
1. Abnor mal r e tur ns (e .g ., e ntre pre ne uria l la b o r) 2. Alloc ation of r isk
Nor
mative implic ations?
Vie w 1: Risk shift fro m priva te to pub lic se c to rs is
de sira b le fo r mic ro e c o no mic (insura nc e ) a nd ma c ro e c o no mic (c o unte rc yc lic a l) re a so ns
SLIDE 29
We alth T axation
No ne q uiva le nc e s
1. Abnor mal r e tur ns (e .g ., e ntre pre ne uria l la b o r) 2. Alloc ation of r isk
Nor
mative implic ations?
Vie w 2: Go ve rnme nt c a n re pro duc e sa me risk
a llo c a tio n unde r a n a nnua l we a lth ta x o r a ma rk-to -ma rke t inc o me ta x thro ug h: a ) e xplic it insura nc e b ) a sse t purc ha se s/ fina nc ia l de riva tive s
SLIDE 30
We alth T axation
No ne q uiva le nc e s
1. Abnor mal r e tur ns (e .g ., e ntre pre ne uria l la b o r) 2. Alloc ation of r isk 3. Maximum r ate
SLIDE 31
We alth T axation
No ne q uiva le nc e s
1. Abnor mal r e tur ns (e .g ., e ntre pre ne uria l la b o r) 2. Alloc ation of r isk 3. Maximum r ate
E
q uiva le nc e ho lds o nly if twe a lth < r
SLIDE 32
30-Ye a r T re a sury Yie ld
(Nominal)
SLIDE 33
We alth T axation
No ne q uiva le nc e s
1. Abnor mal r e tur ns (e .g ., e ntre pre ne uria l la b o r) 2. Alloc ation of r isk 3. Maximum r ate
Nor
mative implic ations?
SLIDE 34
We alth T axation
No ne q uiva le nc e s
1. Abnor mal r e tur ns (e .g ., e ntre pre ne uria l la b o r) 2. Alloc ation of r isk 3. Maximum r ate
Nor
mative implic ations?
Annua l we a lth ta x >>> 2% c a nno t b e re plic a te d
via ma rk-to -ma rke t inc o me ta x o r re tro spe c tive c a pita l g a ins ta x (witho ut he lp fro m the F e d)
SLIDE 35
T hre e T ype s o f Unc e rta inty
SLIDE 36
T hre e T ype s o f Unc e rta inty
1. Valuation unc e r tainty 2. Politic al unc e r tainty 3. Constitutional unc e r tainty
SLIDE 37
T hre e T ype s o f Unc e rta inty
1. Valuation unc e r tainty: T
a x a utho rity unc e rta in a s to “true ” va lue o f a sse t
symme tr
ic or asymme tr ic
SLIDE 38
T hre e T ype s o f Unc e rta inty
1. Valuation unc e r tainty: T
a x a utho rity unc e rta in a s to “true ” va lue o f a sse t
Annual we alth tax: High e xposur
e
SLIDE 39
T hre e T ype s o f Unc e rta inty
1. Valuation unc e r tainty: T
a x a utho rity unc e rta in a s to “true ” va lue o f a sse t
Annual we alth tax: High e xposur
e
Mar
k- to- mar ke t inc ome tax: High e xposur e whe n:
SLIDE 40
T hre e T ype s o f Unc e rta inty
1. Valuation unc e r tainty: T
a x a utho rity unc e rta in a s to “true ” va lue o f a sse t
Annual we alth tax: High e xposur
e
Mar
k- to- mar ke t inc ome tax: High e xposur e whe n:
Dura b ility o f re g ime is in do ub t; o r
SLIDE 41
T hre e T ype s o f Unc e rta inty
1. Valuation unc e r tainty: T
a x a utho rity unc e rta in a s to “true ” va lue o f a sse t
Annual we alth tax: High e xposur
e
Mar
k- to- mar ke t inc ome tax: High e xposur e whe n:
Dura b ility o f re g ime is in do ub t; o r I
nte re st ra te s a re hig h
SLIDE 42 T hre e T ype s o f Unc e rta inty
1. Valuation unc e r tainty: T
a x a utho rity unc e rta in a s to “true ” va lue o f a sse t
Annual we alth tax: High e xposur
e
Mar
k- to- mar ke t inc ome tax: High* e xposur e
Re tr
- spe c tive c apital gains tax: L
- w e xposur
e
SLIDE 43
T hre e T ype s o f Unc e rta inty
2. Politic al unc e r tainty: Unc e rta inty a s to whe the r
re g ime will b e re pe a le d
SLIDE 44 T hre e T ype s o f Unc e rta inty
2. Politic al unc e r tainty: Unc e rta inty a s to whe the r
re g ime will b e re pe a le d
Annual we alth tax: L
e
SLIDE 45 T hre e T ype s o f Unc e rta inty
2. Politic al unc e r tainty: Unc e rta inty a s to whe the r
re g ime will b e re pe a le d
Annual we alth tax: L
e
Mar
k- to- mar ke t inc ome tax: Politic al unc e r tainty inc r e ase s e xposur e to valuation unc e r tainty
SLIDE 46 T hre e T ype s o f Unc e rta inty
2. Politic al unc e r tainty: Unc e rta inty a s to whe the r
re g ime will b e re pe a le d
Annual we alth tax: L
e
Mar
k- to- mar ke t inc ome tax: Politic al unc e r tainty inc r e ase s e xposur e to valuation unc e r tainty
Re tr
- spe c tive c apital gains tax: High e xposur
e
SLIDE 47
T hre e T ype s o f Unc e rta inty
3. Constitutional unc e r tainty: Unc e rta inty a s to whe the r
re g ime will b e he ld to vio la te Co nstitutio n
SLIDE 48
T hre e T ype s o f Unc e rta inty
3. Constitutional unc e r tainty: Unc e rta inty a s to whe the r
re g ime will b e he ld to vio la te Co nstitutio n
Annual we alth tax: High e xposur
e
SLIDE 49 T a x a nd the Co nstitutio n
Ar
- t. I, § 2, c l. 3: “[D]ire c t T
a xe s sha ll b e a ppo rtio ne d a mo ng the se ve ra l Sta te s . . . a c c o rding to the ir re spe c tive Numb e rs . . . .”
Ame nd. XVI: “Co ng re ss sha ll ha ve po we r to la y a nd
c o lle c t ta xe s o n inc o me s, fro m wha te ve r so urc e de rive d, witho ut a ppo rtio nme nt . . . .”
SLIDE 50 T a x a nd the Co nstitutio n
Ar
- t. I, § 2, c l. 3: “ [D]ir
e c t T axe s sha ll b e a ppo rtio ne d
a mo ng the se ve ra l Sta te s . . . a c c o rding to the ir re spe c tive Numb e rs . . . .”
Ame nd. XVI: “Co ng re ss sha ll ha ve po we r to la y a nd
c o lle c t ta xe s o n inc ome s, fro m wha te ve r so urc e de rive d, witho ut a ppo rtio nme nt . . . .”
SLIDE 51 Wha t I s a “Dire c t” T a x?
T a x on L a nd/ Re a l Prope rty T a x on All Pe rsona l Prope rty
Hylto n v. US (1795) (Cha se ) Ve azie Bank v. F e nno (1869) Sc ho le y v. Re w (1874)
Spring e r v. US(1880) Po llo c k v. F arme r’ s L
F e rnande z v. Wie ne r (1945) NF I B v. Se b e lius (2012) (Ro b e rts)
SLIDE 52 Wha t I s a “Dire c t” T a x?
T a x on L a nd/ Re a l Prope rty T a x on All Pe rsona l Prope rty
Hylto n v. US (1795) (Cha se )
✔ ✖
Ve azie Bank v. F e nno (1869)
✔ ✖
Sc ho le y v. Re w (1874)
✔ ✖
Spring e r v. US(1880)
✔ ✖
Po llo c k v. F arme r’ s L
F e rnande z v. Wie ne r (1945) NF I B v. Se b e lius (2012) (Ro b e rts)
SLIDE 53 Wha t I s a “Dire c t” T a x?
T a x on L a nd/ Re a l Prope rty T a x on All Pe rsona l Prope rty
Hylto n v. US (1795) (Cha se )
✔ ✖
Ve azie Bank v. F e nno (1869)
✔ ✖
Sc ho le y v. Re w (1874)
✔ ✖
Spring e r v. US(1880)
✔ ✖
Po llo c k v. F arme r’ s L
✔ ✔
F e rnande z v. Wie ne r (1945) NF I B v. Se b e lius (2012) (Ro b e rts)
SLIDE 54 Wha t I s a “Dire c t” T a x?
T a x on L a nd/ Re a l Prope rty T a x on All Pe rsona l Prope rty
Hylto n v. US (1795) (Cha se )
✔ ✖
Ve azie Bank v. F e nno (1869)
✔ ✖
Sc ho le y v. Re w (1874)
✔ ✖
Spring e r v. US(1880)
✔ ✖
Po llo c k v. F arme r’ s L
✔ ✔
F e rnande z v. Wie ne r (1945)
✔ ✔
NF I B v. Se b e lius (2012) (Ro b e rts)
✔ ✔
SLIDE 55 T hre e T ype s o f Unc e rta inty
“T
ha t Co ng re ss ha s po we r to ta x sha re ho lde rs upo n the ir pro pe rty inte re sts in the sto c k o f c o rpo ra tio ns is b e yo nd q ue stio n; a nd tha t suc h inte re sts mig ht b e va lue d in vie w o f the c o nditio n o f the c o mpa ny, inc luding its a c c umula te d a nd undivide d pro fits, is e q ua lly c le a r. But that this would be taxation of
pr
ty be c ause of owne r ship, and he nc e would r e quir e appor tionme nt unde r the pr
Constitution, is se ttle d be yond pe r adve ntur e by pr e vious de c isions of this c our t.” — E isne r
SLIDE 56 T hre e T ype s o f Unc e rta inty
3. Constitutional unc e r tainty: Unc e rta inty a s to whe the r
re g ime will b e he ld to vio la te Co nstitutio n
Annual we alth tax: High e xposur
e
Mar
k- to- mar ke t inc ome tax: L
e
SLIDE 57 T hre e T ype s o f Unc e rta inty
3. Constitutional unc e r tainty: Unc e rta inty a s to whe the r
re g ime will b e he ld to vio la te Co nstitutio n
Annual we alth tax: High e xposur
e
Mar
k- to- mar ke t inc ome tax: L
e
Re tr
- spe c tive c apital gains tax: L
- w (~0) e xposur
e
SLIDE 58 T a x a nd the Co nstitutio n
Ar
- t. I, § 8, c l. 1: “Co ng re ss sha ll ha ve Po we r T
- la y a nd
c o lle c t T
axe s, Dutie s, I
mpo sts a nd E
xc ise s”
Ame nd. XVI: “Co ng re ss sha ll ha ve po we r to la y a nd
c o lle c t ta xe s o n inc ome s, fro m wha te ve r so urc e de rive d, witho ut a ppo rtio nme nt . . . .”
SLIDE 59
We a lth T a xa tio n a nd the T hre e Unc e rta intie s
Annua l we a lth ta x Ma rk- to- ma rke t inc ome ta x Re trospe c tive c a pita l g a ins ta x Va lua tion unc e rta inty HIGH L INKE D L OW Politic a l unc e rta inty L OW HIGH Constitutiona l unc e rta inty HIGH L OW (>0) L OW (~0)
SLIDE 60
T a ke a wa ys
SLIDE 61
T a ke a wa ys
Annua l we a lth ta x is do ub tful to
re distrib ute / ra ise re ve nue in c urre nt jurisprude ntia l c lima te
SLIDE 62
T a ke a wa ys
Mar
k- to- mar ke t inc ome tax lac ks a de c isive advantage vis-à -vis re tro spe c tive c a pita l g a ins ta x,
e xc e pt a s a pplie d to a sse ts fo r whic h va lua tio n unc e rta inty is lo w (e .g ., pub lic ly tra de d se c uritie s)
Ma rk-to -ma rke t inc o me ta x >>> a dministra tive
c o sts
Ma rk-to -ma rke t inc o me ta x (slig htly) > e xpo sure
to c o nstitutio na l unc e rta inty a nd po ssib ly hig he r/ po ssib ly lo we r e xpo sure to po litic a l unc e rta inty
SLIDE 63 T a ke a wa ys
Suc c e ss o f re tro spe c tive c a pita l g a ins ta x
de pe nds in la rg e pa rt o n whe the r ta xpa ye rs b e lie ve it is dura b le
If so, it’s a c onstitutionally se c ur
e , e asily administr able , and br
alte r native to an annual we alth tax
