Experts say a proposed tax on the net worth of the super-rich would be far more costly than the current estate tax.
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Some politicians have proposed a tax on “net worth” that exceeds $50 million.
Proponents say the so-called Ultra-Millionaire Tax Act would help reduce the U.S. wealth gap, which has been exacerbated by the COVID pandemic.
“The ultra-rich and powerful have rigged the rules in their favor so much that the top 0.1% pay a lower effective tax rate than the bottom 99%, and billionaire wealth is 40% higher than before the COVID crisis began,” said bill co-sponsor Sen. Elizabeth Warren (D-Mass). “A wealth tax is popular among voters on both sides for good reason: because they understand the system is rigged to benefit the wealthy and large corporations.”
But it’s important to note that “the wealth tax would be an annual tax, not a one-time occurrence,” said Jay Sattler, managing tax principal at the West Hartford office of Clifton Larson Allen, a national wealth advisory, outsourcing, audit, tax and consulting firm.
“Although the proposed tax sounds modest — 2% annually on the net worth of households and trusts between $50 million and $1 billion, and a 1% annual surtax (for a 3% overall rate) on the net worth of households and trusts above $1 billion — on a compound basis, it could be far more costly than the current estate tax,” he said.
And valuation could be a big challenge.
“How do you ascertain what the assets are worth at a particular time?” Sattler wondered. “It’s easy for publicly-traded stocks — just look at the day’s listing for the New York or other stock exchange. But what about a privately-held business, or one that’s owned by a private equity investment? And are an individual’s 401(k) or IRA holdings included? What about other non-liquid assets like their home, their car, or their life insurance policies? There are a lot of financial and philosophical challenges related to a net worth tax.”
“I don’t think it will discourage investments, but a net worth tax, or another proposal that calls for eliminating the ‘step-up basis’ for estate tax purposes (which currently generally revalues an appreciated asset to market value for tax purposes upon inheritance) may drive people to invest in things that are less easy to value,” noted Amber Monaghan, a tax and business partner at the national accounting and advisory firm Marcum.
She added that “it’s not easy to establish an accurate market value for collectibles like art and cars, or for some VC-backed companies. And what if a sizable portion of your assets is illiquid — how will you pay the net worth tax? That’s why, generally, net worth is currently not taxed until there’s a realized event, like the sale of assets that generate a gain.”
