Warren & Sanders Tax Plans: How They Will Destroy the American Dream

If you have not been paying attention to the tax proposals being recommended by Presidential candidates Bernie Sanders and Elizabeth Warren, you should. Although their proposals are only seeking to target wealthy earners in the United States, the effects of their proposals will slide down and hurt every American citizen in the long run. Here are a few quick facts about each of their proposals to start with:


Bernie Sanders has proposed a wealth tax levied against an individual’s net worth starting at 1% for couples with a net worth of $32 million and singles with a net worth of $16 million, which then goes up incrementally to a maximum tax level of 8% for couples with a net worth of $10 billion and singles with a net worth of $5 billion.


Elizabeth Warren has proposed a wealth tax levied against any tax filer starting at 2% for those with a net worth of $50 million and above and going up to 3% for anyone with a net worth of $1 billion or more.


Both Warren and Sanders plan to use these additional tax dollars to fund new spending programs such as universal healthcare, government paid higher education, and other entitlement programs.


There are severe and drastic problems with both of these plans (deemed a “Net Worth Tax”), which business owners and citizens need to be aware of. We have highlighted the key concerns below:


  • This is a fundamental shift in taxation. Historically taxation has been focused on income, which is earned each year. This Net Worth Tax is being focused on an individual’s net worth versus income, and it is a tax that repeats each year so long as an individual’s net worth is above the required thresholds. Although they claim their tax proposals only target the 180,000 wealthiest households today, taxes such as this are always a slippery slope and who is to say they will not target households at lower levels in the future, especially if wealthy funding sources dry up and they have on-going programs the government needs to support.


  • This new Net Worth Tax is in essence a double tax, or since it repeats every year, a triple tax, quadruple tax, and so on tax. Income is already taxed when earned, which is how the current income tax system in the United States works. The top tier federal income tax rate for families making over $500,000 per year in 2018 was 37%. Please keep in mind that 37% is only the federal income tax rate. That rate does not include social security, Medicare, or any other taxes paid on earnings, or any state taxes, real estate taxes, sales taxes, or other taxes individuals must pay each year. This new Net Worth Tax is taking income and wealth that has already been taxed, or if it is long-term capital gains, that will be taxed in the future when earned, and taxing it again, and again, and again. Is it really fair to keep repeatedly taxing individuals that have already paid the maximum tax into the system? There are questions if a Net Worth Tax is even constitutional, since it effects a group of citizens disproportionately.


  • How does an individual and the government figure out what someone’s net worth is and what their Net Worth Tax should be each year? Everyone’s net worth is typically made up of many different things. It includes obvious things such as bank and brokerage accounts, retirement accounts, residences, and cars. But it also includes ownership interests in various businesses, investment real estate, collectibles, etc. All of these items have value, but the value for a lot of these items is not defined by a market like the stock market. In order to value these items typically an expert or an appraiser needs to be brought in to determine the value. Is the government going to burden wealthy individuals by requiring them to value all of their assets every year? Both Warren and Sanders have proposed either a new or greatly expanded IRS to audit the wealthy to verify and determine their Net Worth Tax, with Sanders proposal calling for 30% of the wealthy to be audited each year. Do we really want the government poking its head into everything we own?   Needing to verify taxpayers net worth’s would greatly expand the IRS, coming at a substantial cost to taxpayers. In addition, the cost and time to wealthy individuals to value their net worth each year could be substantial. Neither of these are a winning situation and will end up wasting money and capital that could flow into the economy in other more positive contributory ways. As the number of wealthy decline due to this Net Worth Tax, everyday citizens will still have to bear the cost burden of an even more bloated government, including a much larger IRS.


  • Both Warren and Sanders plan to fund large entitlement programs with the Net Worth Tax. However, the money being generated from the Net Worth Tax will eventually run out. Let’s use a couple with a $20 billion net worth as an example. Under Sander’s plan in Year 1 they would pay an 8% tax on that net worth, which would be $1.6 billion. That would reduce their net worth down to $18.4 billion for the following year. Figuring no change in their net worth (which keep in mind could move up as well as down due to changes in market conditions) in Year 2 they would pay an 8% tax of $1.47 billion. That is a decline in tax to the government after one year of $330 million from just one family falling under the parameters of the Net Worth Tax. By Year 10 that individual’s net worth that started at $20 billion would have been reduced by more than half, down to $9.47 billion, and the tax being collected in Year 10 would be $823 million, less than half what was collected in Year 1. This decline will continue every year going forward so long as the Net Worth Tax is in place. Using the above example, by Year 10 all the new government spending programs would already be in place. Where is the money going to continue to come from to support those programs when the wealthy no longer have the assets to tax going forward? In order to generate new tax revenues either the income brackets getting taxed under this program will have to go down to include more people in the Net Worth Tax, the tax rates will have to go up for the Net Worth Tax, or all citizens will have to pay new taxes to support these spending programs. As can clearly be seen, this Net Wort Tax is not a long-term solution as it destroys wealth and hence the tax base they are looking to tax. In fact, Bernie Sanders has even stated that part of the goal of the Net Worth Tax is to cut the wealth of billionaires in half, which directly affects the amount of tax revenue the government can earn in the future on the Net Worth Tax.


    I know we used the maximum tax rate in our sample above, but even if you use a lower tax rate, the eventual result is the same; taxpayers net worth’s decline and the associated taxes being collected decline as well.   It just takes more time for the same result to happen with a lower tax rate.


  • Although someone might have a large net worth, it is unlikely their net worth is completely liquid. As discussed before, a wealthy person’s net worth is often made up of various ownership interests in businesses, real estate, and collectibles, which are not liquid, and even some investment accounts like retirement accounts and insurance are not really liquid either (with large penalties to cash them out). If wealthy individuals suddenly have to pay a large Net Worth Tax at the end of the year it will likely mean they are forced to liquidate assets to pay that tax.   It is unlikely most wealthy individuals will have sufficient liquid assets (cash and marketable securities) to cover one year not to mention multiple years of the Net Worth Tax. Some assets may not be easy to liquidate and could take time, such as selling real estate, businesses, collectibles, etc. Plus, liquidating some assets could cause wealthy individuals to earn income off of those assets, which would first be taxed under standard income tax rules, forcing them to liquidate even more assets to cover the Net Worth Tax and accelerating the decline in their net worth.


    Forcing all wealthy individuals to liquidate assets will do two things. First, it will pull a substantial amount of liquidity and capital out of banks and the equity markets. This will hurt the economy as there will be substantially less money available to invest in new business ventures, real estate, the stock and equity markets, and in other markets. Secondly, the need for so many assets to be liquidated at one-time each tax season is going to lead to a large decline in business and real estate valuations. With no wealthy individuals left to buy (because all wealthy individuals are likely to be liquidating to pay the Net Worth Tax), in order for those assets to get sold they will go down in value to a point where someone can afford to buy them. Due to the Net Worth Tax we will end up seeing a large decline in value in all asset classes across the United States, from the value of businesses, to the stock market, real estate, and in other asset classes. This decline will not only hurt the wealthy, but it will hurt everyday citizens who have money in banks, the stock market, mutual funds, and real estate, including home values. As values continue to decline, the wealthiest Americans net worth’s will continue to decline, and once again there will be less tax to support all of the new entitlement programs.


  • Wealthy Americans are likely to liquidate assets and move out of the United States to protect their net worth. The number of countries they could go to are abundant because no other country taxes an individual’s net worth like Warren and Sanders have proposed. In addition, foreign investment in the United States from wealthy investors will likely cease as foreigners will not want to get exposed to the Net Worth Tax. This will make the United States less competitive on the world stage, as our companies, stocks and real estate are devalued by the lack of wealthy and international investment.


  • The wealthiest 3% of Americans already pay roughly 50% of all taxes collected by the federal government. A portion of those taxes are already paid based on their net worth as they earn income from that net worth each year. As the wealthiest Americans see their net worth’s decline, general tax revenues from their net worth will decline as well. Even worse, if wealthy taxpayers decide to leave the United States due to the Net Worth Tax, what is going to replace that tax revenue? The government is going to have to find other sources of tax revenue or further tax everyday Americans to support the new entitlement programs already in place. Any large decline in the stock market, other equity markets, business world, and real estate, effects incomes and the money available for all sorts of taxes from all tax paying classes, making it even harder for the government to find the funding it needs.


A policy of taxing individuals on their net worth, no matter what their net worth is, is a policy that will lead this county down a rabbit hole and will destroy the fabric of our society. Equity, real estate, and business markets will be severely damaged or destroyed. Wealth will diminish very quickly and hence the taxes needed to support new entitlement programs will disappear, leaving the rest of the country to cover the costs of those programs. This tax will take the United States backwards on the world stage and will destroy the strength and prosperity of the U.S. economy.


It is hard for many people, certainly those at the lower levels of the income scale, to understand someone who has made millions or billions and is worth millions or billions. It does not always seem fair. However, millionaires and billionaires are the largest driving forces of the United States economy, investing in everything from business start-ups, to housing, real estate, the stock and equity markets, and so on. They are also the most philanthropic, donating to everything from organizations that support the poor, non-profits, hospitals, education, the arts, etc. And the wealthiest Americans already pay the most in taxes and are the biggest supporters of the U.S. government. If they were to get wiped out or to leave the country, the United States’ budget would be destroyed. Although taxing the rich with a Net Worth Tax might seem like a good idea to some, it goes directly against the fabric of everything the United States stands for. A Net Worth Tax represents the start of redistribution of wealth, and once that starts where does it end. If you believe in the freedoms and the free markets of the United States, and you believe in the American Dream, you cannot support such a tax as it will destroy America as we know it.