Business and Society Review, Winter 1974
WEALTHY PERSONS in America enjoy security, privilege, power, and freedom from discomfort and demeaning chores. Some of these benefits derive from wealth itself, others from its unequal distribution. It is the latter that are properly the concern of the non-wealthy.
Why should a few men and women have lots of wealth, while most others have very little or none at all? The standard answer is that wealth is society’s reward for useful contributions. In a moment I will consider how useful some of these contributions are. But even if all were useful, a legitimate question for a democratic society is: how great should be the disparity in rewards? Should the most useful contributor receive five times the reward of the least useful? Ten times? A hundred times? And who is to define usefulness?
These are difficult questions of equity that cannot be fully answered here. It can be said that wealth, whether its recipient deserves all of it or not, has certain characteristics. One is that it is a bit like nuclear fission: once you’ve accumulated a critical mass, you can watch it split and multiply all by itself.
Without suggesting precise numerical limits, it can be argued that private wealth should not be allowed to endlessly enrich its owner, far beyond what he or she may require to live comfortably, when the vast majority of Americans must live off their labor alone. A good case can be made that, in a democratic society, it is necessary to limit the size of the critical mass that any individual can call his own, or at least place stiff penalties on excessive accumulations. One way to do this is through wealth taxation.
Another argument for taxing wealth derives from the inadequacy of answers to the question: why shouldn’t wealth be taxed? One answer—that wealth should not be taxed because income is—is grossly deceptive. Richard Nixon’s tax returns should remind us, if we don’t know already, that the mere fact that a person’s income is high does not mean that he pays high income taxes. And even if all income tax loopholes were closed, vast fortunes could still be amassed without generating much income along the way.
At this point the “useful contribution” argument is usually wheeled in. But the fact that a particular contribution is useful does not mean that its rewards should be tax-exempt or lightly taxed, especially when those rewards are grossly disproportionate to the rewards for other useful contributions. And just how useful are some of the activities and maneuvers that lead to the greatest collections of wealth? Let me list, in no special order, nine ways in which personal wealth is amassed in America.
1. Adding to goods and services at competitive prices. This is a legitimate path to personal wealth (though this doesn’t mean the wealth should not be taxed). Consider an entrepreneur who builds a new brick factory and sells bricks in competition with existing brick manufacturers. He is adding to society’s supply of bricks, and thereby performing a useful function that deserves reward. If his bricks are well made and there is a market—i.e., a need—for them, his business will acquire value, and that value will constitute the owner’s personal wealth. So far so good.
2. Price fixing. Now suppose that the brick manufacturer buys out his only three competitors in a particular region, lowers the number of bricks manufactured, and raises the price for each. The value of the four original factories is now greater than before, and the entrepreneur’s personal wealth soars. But society is worse off than it was.
Price fixing is a much-used means of wealth accumulation, and only rarely is it found to be a crime. Steelmakers do it, bakers do it, even doctors and attorneys do it. The basic strategy is to come up with a product or service that people want or need and arrange to charge far more for it than the product or service costs to provide. Sometimes this is done by keeping out of the marketplace others who could deliver the item at a lower price, and sometimes by arranging with other producers collectively to charge excessive prices.
Monopoly is the mother of this kind of wealth-making. Patents, trade associations and government regulation are its handmaidens. Each year, it has been estimated, $48 billion to $60 billion gets ripped off this way, and much of it becomes personal wealth.
3. Inheriting. According to a study by the Federal Reserve Board, inherited wealth accounts for a “substantial portion” of the total assets of 57 percent of those Americans with incomes of $100,000 or more. Inheritance taxes don’t do much to diminish the size of these old fortunes. For example, a recent Wall Street Journal article noted that the Mellon family owns 30 percent of the Aluminum Company of America, 40 percent of the Mellon National Bank, 27 percent of Gulf Oil, and 20 percent each of Carborundum Co., Koppers Co., First Boston Corp. and General Reinsurance Corp.
4. Rearranging. The syndicate formed by J.P. Morgan to underwrite the United States Steel Corp. took for its services securities worth $62 million. Felix Rohatyn, Harold Geneen and dozens of modern conglomerateurs could tell similar stories. They don’t add anything to the supply of goods and services; they just rearrange things a bit, usually with an eye toward price fixing, and always in such a manner that their own percentage comes first
5. Anticipating. Many private fortunes are based on anticipating things that may or may not happen. Millions of dollars are made in the mining business, not from the extraction of resources, but from the sale and resale of stock based on imagined future profits. Much greater fortunes are won in the commodities market than are ever earned by the farmers who produce the commodities. When the dollar sinks, gold rises, or silver falls, and enormous windfalls are made. When a businessman with a clever idea or a good hustle goes public, he can find himself overnight in possession of $100 million worth of paper based on nothing more than other people’s guesses about the future. (Technically, this could be described as “immediate capitalization of anticipated earnings.”) People like H. Ross Perot became overnight billionaires this way. The best part is that most fortunes like Perot’s are in the form of unrealized capital gains, on which not a penny in taxes is paid.
6. Skimming. When gambling moguls in Las Vegas siphon off half the house’s winnings before. reporting the rest to the tax collectors, that’s skimming. When corporate executives vote themselves $250,000 salaries, stock options, bonuses, private jets, etc., the racket is much the same: they are perched atop a money-collecting machine, and they use their perches to take the first and biggest nibbles.
7. Raiding God’s cookie jar. Private appropriation of resources bestowed upon mankind as a whole is another path to riches that has been favored for many generations. Leland Stanford and others made off with millions of acres of public land; J.P. Getty and others made off with billions of barrels of oil, getting back for them whatever the market will bear.
8. Reaping the unearned increment. John Jacob Astor knew what it was about: “Buy on the fringe,” he said, “and wait.” The value of scarce things, land especially, rises as society grows in size and well-being. If you happen to own some of those scarce items, you reap the gains in value even though you don’t lift a finger. Books with titles like How to Get Rich While You Sleep are usually about land speculation. Richard Nixon has said he “earned” every penny he got from his Florida and California real estate deals. That’s hogwash. He may not, in a legal sense, be a crook, but he certainly did not “earn” the increased value of his properties.
9. Recycling the green stuff. Handling other people’s money is a fine way to get lots of your own, as any banker, broker, insurer, arbitrageur, etc., can attest. Bankers, the most artful recyclers, have their cake and eat it, too. The banker borrows your money and lends it to someone who deposits it back with him; then he lends it again, etc., etc., proving that two plus two can equal five if the twos are recycled fast enough.
THE BEAUTY of most of these ways of acquiring wealth is that the thievery involved is frequently difficult to perceive. It hides behind the mythology of the ever-expanding pie: new, previously non-existent wealth is being created, therefore the wealth accumulator may collect his rake-off without making anyone else poorer. Sometimes new wealth is created—for example, the new brick factory built by our aforementioned entrepreneur. Much of the time, however, it is not.
The illusion of new wealth comes from the fact that existing assets, such as factories, stock, land, gold, oil underground, patents, franchises, etc., are given higher values, but this kind of phony wealth-creation has its victims, and is hardly deserving of reward. The victims in many cases are several times removed, feel no pain, and are difficult to identify by name, but they are nonetheless there. Some are small investors, many are workers and consumers, whose individual losses are “only pennies a day”—for example, the man who pays $300 too much for an automobile because of oligopolistic pricing practices.
Even if the new-wealth thievery, i.e., appreciation in value of existing assets or immediate capitalization of anticipated earnings, were totally victimless, the public would be cheated by the excessive private appropriation of this wealth. It is the public, and the growing economy it supports—the markets, technology, communications network, and the rest of the infrastructure—that makes this artificial wealth possible. In return, the public is entitled to the benefits of this wealth, which could be used for schools, health care, or income redistribution through “national growth dividends,” (on which more later).
What the wealthy owe to society was well explained by Tom Paine in 1796:
Separate an individual from society, and give him an island or a continent to possess, and he cannot acquire personal property. He cannot become rich… All accumulation, therefore, of personal property, beyond what a man’s own hands produce, is derived to him by living in society; and he owes, on every principle of justice, of gratitude, and of civilization, a part of that accumulation back again to society from whence the whole came.
WEALTH TAXES may conveniently be divided into two categories, those that are levied at regular intervals and those that are collected upon death. Both have a lengthy tradition in America. The first federal death tax was enacted in 1862; the present estate tax was adopted in 1916. Many states also impose modest wealth taxes at death. Some disadvantages of the death tax, at least as presently written, are:
• It can be avoided fairly easily through gilts made before death, trusts, and other strategems;
• It misses wealth that never dies, i.e., wealth held by corporations, trusts, and foundations;
• And it leaves untouched, until the holder’s death, many fabulous fortunes achieved within a single lifetime.
Periodic wealth taxes, albeit extremely modest ones, were applied by many of the American colonies as long ago as 1646. In Massachusetts, the principal form of taxable wealth was land; in Virginia it was cattle and slaves. By the early 19th century an annual wealth tax commonly known as the property tax had become the chief source of local government revenue. This tax was principally directed at land, since that was then the major form of wealth, but it also applied to other forms of wealth deemed tax-worthy by various states. Assessment was generally based on market value.
The mid-19th century saw the ascendance of two important principles of property taxation, universality and uniformity. Universality meant that all forms of wealth were included in the property tax base; uniformity meant that all property subject to taxation would be taxed at a uniform percentage of market value.
Many states wrote these principles into theirconstitutions. For example, the California Constitution of 1879 stated that property subject to taxation would include “moneys, credits, bonds, stocks, dues, franchises, and all other matters and things, real, personal and mixed, capable of private ownership. ” Each of these forms of wealth would be taxed “in proportion to its value,” i.e., at flat rate, not progressively.
Unfortunately, but not surprisingly, it was extremely difficult for localities to collect the tax on moneys, credits, bonds, stocks, etc., since ownership of such “intangible” wealth was easily hidden. Consequently, those forms of wealth that could not be readily moved or concealed, i.e., land, buildings, and bulky personal property such as machinery, soon absorbed virtually the entire burden of the property tax. In due course this situation was legitimized as states amended their constitutions and statutes to exempt most intangible property from taxation. Thus did the principle of universality die; thus did the property tax degenerate from a genuine tax on wealth to a tax primarily on housing, and a regressive tax at that.
Consider the situation of a family with a zero net worth and paying $200 a month in rent. Approximately 25 percent of the rent, or $50, represents the landlord’s property tax passed on. This means that the true rent is $150 a month, with a “sales tax” of $50, or 33 percent, added on. No other commodity sold in the United States—except cigarettes, liquor, and gasoline—carries such a heavy tax add-on. Since the person paying the tax has no net worth, and must pay the tax out of current income, the property tax in this case can hardly be considered a wealth tax. It is much closer to a sales tax or income tax.
To appreciate what the demise of universality in property taxation has meant, consider these statistics. According to UCLA professor Donald Hagman, the total national wealth in 1968 was slightly more than $7 trillion. About $4 trillion of that was in financial assets. Only $1 4 trillion was included in the property tax base. That meant property tax loopholes totaling $5.6 trillion! Or, juggling the figures another way, a return to universality would make it possible to cut taxes on homes and other real and personal property by 80 percent.
How just is it to tax a basic necessity like shelter far more heavily than such non-necessities as stock and bond portfolios? Housing is not only a necessity, it is a consumption item that brings no income to its users. The people who do profit from housing—banks, developers, absentee landlords—pay no taxes on it, or shift their taxes to tenants. Stocks and bonds, on the other hand, have that wonderful ability to spew dollars into their owners’ pocket without any physical effort on the owner’s part. These dollars are taxed, but in the case of capital gains, at rates lower than those applied to wages.
HOW MIGHT a universal wealth tax be revived—and it is worth stressing the word revived, since the idea of wealth taxation in America is older than apple pie?
Answers fall into two categories: the politically semi-practical and the visionary. In the first category is a proposal by Professor Hagman for a federal “valorem intangibles tax.” This would be a flat-rate tax on the value of income-producing intangibles such as corporate stock, bonds, and savings accounts. It would be self-declaratory and closely coordinated with the federal income tax. Hagman suggests a tax rate of one percent. Thus, if a person owned $100,000 worth of stocks and bonds, he would send in $1,000 along with his federal income tax. Total annual revenue (using 1968 data) would be about $20 billion. Though the rate is uniform, the tax would be progressive because poor people don’t own much income-producing intangible wealth.
Professor Lester B. Synder of the University of Connecticut, in an intriguing paper entitled “Taxing the Unlanded Gentry,” suggests another practical approach to taxing wealth. He cites the Massachusetts 9 percent tax on income (including capital gains) derived from intangible property, and Connecticut’s similar 6 percent tax, as notable efforts to make up for the exclusion of intangibles from the regular property tax base. If each state imposed a 10 percent tax on the investment income from intangibles, Synder calculates the revenues raised would total $12 billion nationally, and permit current property tax rates to be reduced by 46 percent in Florida, 41 percent in Pennsylvania, 36 percent in New York, and 22 percent in California, to cite a few examples.
A third approach, and at this point a purely visionary one, would be to enact a personal (not corporate) net worth tax at the federal level. Such a tax would be universal in that it would apply to all forms of personally-held property, tangible and intangible, income-producing and non-income-producing. It would be harder to administer than income or death taxes, but not prohibitively so. Death taxes require a complete accounting of personal net worth; an annual or periodic net worth tax would simply mean earlier and more frequent accountings. Persons whose net worth is under $100,000 (about 98 percent of the population) might be exempted from the tax, making administration easier. Since the top 2 percent owns about 30 percent of the wealth, there’d still be plenty left to tax. Like the federal estate tax, the rate structure of the net worth tax could be progressive, ranging (if desired) up to 100 percent of holdings above a given figure.
What might be the consequences of a periodic net worth tax? There would, first of all, be a gradual whittling down of large fortunes. Thus, assuming a tax rate of 70 percent on the portion of personal net worth in excess of $10 million, an individual worth $20 million before tax would be down to less than $13 million after tax. If his fortune grew to $15 million over the next year, the tax, if annually applied, would cut it down again to under $11. 5 million. The nest egg would continue shrinking as long as its growth rate was less than the marginal tax rate. Thus, there would, in effect, be a “wealth ceiling. ”
A second consequence of a net worth tax would be a direct redistribution of wealth, if the revenues were funneled into a Wealth Redistribution Trust Fund, rather than into the general treasury. Such a trust fund would be analogous to the Social Security Trust Fund, except that instead of recycling income from young wage-earners to the aged and disabled, it would recycle wealth from the super-rich to the not-so-rich.
This idea is also Tom Paine’s. As partial compensation for every individual’s “loss of his or her natural inheritance” owing to the introduction of the system of landed property, Paine proposed creation of a national fund from which payments would be made to every person at certain points in their lives.
The payout of a modern wealth redistribution trust fund might be termed a “national growth dividend.” It could be made in cash, bonds–, or credit to purchase corporate stock along the lines Louis Kelso has proposed. Alternatively, revenues from the tax could be placed into one or more Public Enterprise Corporations created by the federal government to establish or buy control of an energy company, a steel company, an automobile company, etc. These public enterprises would compete against private corporations in shared-monopoly industries, with many public benefits resulting. Stock in the Public Enterprise Corporation would be distributed on a non-transferable, one-person-one-share basis, as a kind of birthright to all Americans. Dividends would be paid each quarter in accordance with earnings. Since revenues from the net worth tax would be heavy in the first few years (while fortunes were still large) and relatively tight thereafter, this might be a good way to dispose of the early “windfall” from the tax.
A pleasing consequence of a strong net worth tax might be a change in the capitalist ethos. If personal fortunes could not get much larger than, say, $10 million, this would mean that as businesses grew, their original owners would either have to pay the net worth tax, share equity with workers or the community, or give away their holdings to charity. (It might be wise to limit the “charity” escape route, now so effectively used to avoid income and estate taxes.) Thus, if a capitalist after amassing $10 million still wanted to build an empire, he’d be doing it for his workers, charity, or the public at large.