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A New Wealth Tax Would Target Billionaires. The Middle Class Should Worry, Too.

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President Joe Biden’s new budget proposal includes a wealth tax it says would target the top 0.01% of households.

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About the author: Thomas Hoenig is a distinguished senior fellow with the Mercatus Center at George Mason University, a former vice chairman with the FDIC, and the former president and CEO of the Federal Reserve Bank of Kansas City.

In its new budget proposal released this week, the White House is resurrecting a form of Sen. Ron Wyden’s (D., Ore.) wealth tax on certain appreciated assets of some Americans, regardless of whether they’ve been sold. It would require households worth more than $100 million to pay at least 20% in taxes on a combination of both income and unrealized gains in liquid assets owned. The administration indicated the tax would affect the top 0.01% of households, with more than half of the revenue coming from billionaires. The idea of taxing wealth, and not just income, remains a priority among progressives, and the White House seems determined to have it become law.

It would be best for the middle class if the idea fails, and here is why.

This proposal, which would apply to unrealized gains on a portion of a household’s assets, is being sold as a tax on only the wealthiest Americans—one that would have little or no effect on the rest of America’s citizens. Of course, everyone should pay their share of taxes, and certainly the wealthiest among us. But take a moment and think about the longer-run implications.

This proposal would fundamentally change how the tax system operates and would open a new revenue stream for the Treasury. It doesn’t take much imagination to see where the proposal might take us from there. It follows a familiar pattern that we’ve seen before: Introduce a new tax only for the wealthy and over time, as the Congress looks for more revenue sources, apply it to a wider portion of the population. It’s a tried-and-true approach.

We all know the wealthy can take care of themselves, and you can be sure their advisers and lobbyists would work to minimize the tax’s effects. What we should be concerned about, if we have learned anything from history, is that taxes and their scope seem always to morph and extend to the middle and upper-middle classes, who by their sheer numbers pay a heavy burden of taxes in this country.

The proposal sounds so simple. Report income and unrealized gains in liquid assets and tax them at a minimum of 20%—the assumption being that only the richest experience significant increases in asset values. However, the truth is that in a period of persistent asset inflation, which we have had now for decades, such a tax eventually would apply to an ever-larger proportion of the population, notably the middle class.

The income tax is a good example of how a tax on the wealthy becomes a tax on the middle class. In 1913, Congress passed the first income tax under the newly passed 16th Amendment to the Constitution, which topped out at 7% for income above $500,000. After a temporary, significant tax increase to pay for World War I, tax rates settled in at 25% on incomes above $100,000. It was only a matter of time before the politicians forgot about the “wealthy” part.

Another example is the alternative minimum tax introduced in 1969 to limit, for the wealthiest income earners, certain deductions to insure they pay a greater share of the tax burden. However, with price and wage inflation, the number of households subject to the AMT increased from 200,000 in 1982 to 5.2 million in 2017, although their real income remained relatively unchanged. The tax was adjusted down in 2018, but only temporarily, and the middle class will again carry a heavier tax burden after 2025.

The government has engaged in multi-decade policies of incurring large deficits and money growth resulting in highly inflated asset values, but not real wealth, for a far larger proportion of the population than the wealthiest 700 billionaires. The administration indicated this tax would raise $360 billion over the next decade, with half coming from billionaires. I would suggest that over time this number will grow and will come from an increasing number of middle-income households, who necessarily always get stuck with the tax bill. With experience as a guide, it seems likely that as Congress grows the national debt and the Federal Reserve prints excessive amounts of money, this new means of taxation will be a rich new source of revenue. The Trojan Horse is the promise of government benefits for all, paid for with taxes on “only” the rich.

We cannot know the speed at which the tax would apply to ever more of us, but we can be certain with time you would need to get out your checkbook. It is a pattern consistently followed in U.S. politics. That’s more than enough reason to be skeptical.

Guest commentaries like this one are written by authors outside the Barron’s and MarketWatch newsroom. They reflect the perspective and opinions of the authors. Submit commentary proposals and other feedback to ideas@barrons.com.

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