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Dumb Warren idea; worse analysis of it in Wall Street Journal

Posted by John T. Reed on

Lousy op-ed in the WSJ on wealth taxes
An op-ed in today’s WSJ says “Elizabeth Warren doesn’t Understand Wealth Taxes. I believe it. But neither does Alan Cole, the Wharton student who wrote it.
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He says we already have taxes on capital and should. I am not sure we should have any. The money was already taxed once when earned. By what right does the government tax it again? I believe there is no capital gains tax in Singapore which is one of the most prosperous places on earth.
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An argument can be made that real estate should be taxed to cover services like fire department, police department, national defense, courts, and to keep property being put to productive use. But all but the last can and should be paid by a head tax which was the original tax in the Constitution. The XIII Amendment had to be passed to create the income tax because the Constitution said only a head tax could be levied (everyone pays the same dollar amount)—a sort of service fee for federal services for defense, federal courts, ICE, and so on.
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Cole says net worth taxes are hard to use because net worth is hard to measure. It is standard in inheritance taxes, real estate taxes, and personal property taxes like our annual car tax here in CA.
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Cole never mentions the main problem with wealth taxes: liquidity. You often hear about this forcing a family to sell their farm or ranch or business against their wishes in order to pay the inheritance tax. The reason we have IRC § 1031 tax free exchanges is there is no sale proceeds in an exchange. Taxing exchanges would therefore force the sale of the property.
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Cole says some assets are best taxed based on their value; others, based on the income they produce. That is a 2/3-assed statement of the standard appraisal technique which uses the market value, income, or replacement cost approach on each asset but reliability varies from property. For example, the replacement cost approach is best if the property is unique (no comps) or is not rented out to enable the income approach. Cole keeps saying sometimes this, sometimes that, and implies good reasons, but he never states the reasons. I just did.
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Cole says ad valorem real estate taxes violate the rule that if you tax something you get less of it. No, they don’t. In the Great Depression, people tore buildings down to avoid paying high property taxes on them. Today, I believe that would be taken care of by tax appeals. I do not know why it was not during the Depression.
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High taxes today make affordable housing impossible, so you get less of it or none of it. He also says housese do not incur capital gains taxes like other assets so property taxes make up for that. Bull! Property taxes mainly fund schools. And houses do incur capital gains taxes. There is a $250,000 per spouse exemption for capital gain tax on the sale of a principal residents under IRC §121. But gains above that amount are taxed. So are those on homes that do not qualify for §121. And gain tax goes to the federal general revenue, not local schools. 
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Local property taxes do not make up for federal general revenue lost to §121. They are totally unrelated.
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Cole also says a federal property tax is unworkable because of the aforementioned head tax requirement. Well, that did not stop the income tax. He says they get around the Constitution by doing an imputed income tax on owner-occupied homes. That is just the application of the above-mentioned income approach to appraisal. You still need a Constitutional Amendment.
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He says Warren says to use gross rent multipliers or price-earnings ratios to value companies for tax purposes. That is idiotic. Such crude arithmetic would over tax many businesses and thereby drive them out of business. There is no shortcut to appraisal.
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He also wants higher tax rates on “monopolies” (they are already illegal) or companies with “strong brands” or “market structure” (whatever that is) and “complacent mature businesses” whatever those are. That would trigger the rule that what you tax, you get less of. We do not want less of profitable companies. Mr. Cole is apparently some sort of nutty Marxist.
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Cole ends saying that Warren’s proposal only “shows her lack of sophistication.” Not unlike this op-ed showing that Cole himself has a very muddled understanding of the same topic and the editors at the WSJ have a shameful lack of understanding of some of the op-eds they approve.

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