Senator Elizabeth Warren’s campaign promise to fund social programs by making America’s wealthiest pay in a small percentage of their fortune could create a costly and difficult compliance system for both the taxpayers and the IRS.
On the one hand, a wealth tax affecting the country’s 75,000 richest households could raise $2.75 trillion over the next decade. Still, it would be difficult for the IRS to actually implement this wealth tax, as the more money people have, the more they tend to have in non-traditional assets.
The agency already collects some income flow information—interest income, dividends, capital gains—through banks, mortgage lenders, mutual funds, and insurance companies. It would be very simple to add one line on these information returns with the end-of-year account balances. After all, the IRS already keeps tabs on household wealth using forms reporting the end-of-year value of individual retirement accounts.
The hard part comes when wealthy people don’t just have cash, stocks, and bonds that can be easily valued. People worth more than $50 million tend to spin a complex web of investments that can include highly speculative assets, e.g. oil and gas rights or minority stakes in privately-held companies.
Two qualified appraisers with two different viewpoints could arrive at radically different answers about the value of such investments. A typical appraisal also takes about four to six weeks, which is time-consuming and costly. At the same time, to make the wealth tax work in the short run, high audit rates on the very rich are needed—all this against the recent shrinking of the IRS in recent years, as Congress has repeatedly cut the agency’s budget.
Adding a wealth tax to the agency’s responsibilities would be a tall order. The IRS now audits some 30% of estate tax returns of people worth at least $10 million when they die. Extending examinations of about one-third of the 75,000 wealth tax returns that would need to be filed each year would add an additional 25,000 audits to the IRS’s workload.
Of course, for those who make their living valuing other people’s businesses, the wealth tax is a money-making opportunity.
For more information, please read:
Warren’s Wealth Tax Could Make Compliance Hard For Filers, IRS | Financial Advisor Magazine