Democracy: A Journal of Ideas has a forum on taxation and revenue-raising needed to help fund n needed reforms, featuring more than a dozen articles by top experts. Here is a teaser from one of the articles, “The Right Way to Tax the Rich” by Brian Galle, a professor of law at the University of California, Berkeley and a senior fellow at the Roosevelt Institute:
Taxing the accumulated wealth of America’s ultrarich should be a top tax-reform priority for the next administration. To be sure, there are other low-hanging tax-policy fruit, such as reversing recent giveaways to businesses large and small, and putting the United States back on a path to share in historic global commitments to tax multinational firms more effectively. But the ultrarich, and billionaires in particular, have become perhaps the central story in U.S. political life. They dominate campaign spending, and have bought up influential spots in media, infrastructure, and the President’s Cabinet. Tax policy alone cannot repair that problem, of course. But it can do far more than it does today. Indeed, by one recent estimate from researchers at my home institution of University of California, Berkeley, the wealthiest billionaires pay only one-third the effective income tax rate that top earners faced under President Ronald Reagan.
The key word in that sentence is “effective.” Taxing the ultrarich isn’t likely to be as simple as just raising the tax rates they face. Because most of the wealth and power of the ultrarich derives from growth in the value of investment assets, we face a series of practical, legal, and even constitutional challenges in designing an effective tax that can reach a meaningful share of their stockpiles of earnings.
These challenges are solvable, as I explain in great detail in my recent report from the Roosevelt Institute, “How to Tax the Ultrarich.” Briefly, the United States should follow the path of other countries in instituting a tax on wealth, or alternatively an income tax on individuals’ annual accumulations of value that today escape the U.S. tax system. But to satisfy recent demands from the Supreme Court, that tax would not be imposed annually, but rather deferred until taxpayers choose to sell their property. At sale, the taxpayer would pay a higher rate, with the exact rate set so that the taxpayer cannot get any net “time value of money” benefits from deferral. (The time value of money is the extra investment gains taxpayers get from being able to set aside and invest money they would otherwise have paid in tax.) This same system can help to repair our currently dysfunctional regime for intergenerational transfers of wealth as well.
The Multiple Challenges to Taxing Wealth…
Let’s unpack the challenges in a bit more detail, then return to a more detailed version of the possible solution. The core problem we have in the income tax today, both in the United States and around the world, is that income taxes are largely built around what’s known as the “realization” principle. The realization principle is the notion that we should measure income from investment assets only when they are sold (or otherwise disposed of). That approach reflects early-twentieth-century limits on a tax administrator’s capacity to verify what assets a taxpayer owns and how much they are worth. And yet, even as early as 1909, some taxpayers did have to report and pay tax on annual changes in their investments’ value. For instance, that was how the U.S. Treasury implemented the definition of “income” under the corporate income tax, which predated the 1913 adoption of the modern individual income tax.


