Desperate times call for desperate measures. The American public debt is around 14 trillion dollars. This debt is likely to increase to around 24 trillion dollars in another decade according to some projections. How long will it take to bring this debt level down to, say, 10 trillion dollars. If the federal budget runs an annual surplus of 100 billion dollars, it will take about 140 years to reduce the debt from 24 trillion dollars to 10 trillion dollars. At an annual surplus of 200 billion dollars, it will take about 70 years to reduce the debt by that amount. Sustaining such surpluses is going to be difficult given American political and economic realities. New kinds of taxes may well become necessary. Is it time, then, to examine a tax on wealth and not just on income, to help pay down a part of the debt ? It is a difficult question, and accurate quantification is of the essence if one wants meaningful answers to this question.
Let us make a simple calculation. According to some reports, 5% of Americans own about 95% of America's wealth. Once again, we are distinguishing wealth from income. In a low upward and downward mobility environment, income and wealth should track each other over long periods of time. In a high upward and downward mobility environment, wealth may not track income. 5% of the American population is about 20 million people. Let us assume 50 trillion dollars as the total wealth of America. This number may not be very accurate. It may be 75 trillion dollars or it may even be 100 trillion dollars. The reader can find out the accurate number. The exact number is not that important for our examination. 95% of 50 trillion dollars is about 48 trillion dollars. If 20 million Americans at the top of the economic ladder own 48 trillion dollars of wealth, then on an average, they own about 2.4 million dollars per person. There are people like Bill Gates who own several billion dollars. For our argument, let us take the average number. If one were to try to repay 14 trillion dollars worth of public debt by taxing the wealth ( not just income ) of these 20 million Americans at the top, one would need about 0.7 million dollars from each of them. In an actual scheme, billionaires would pay more than millionaires, and so on and so forth. We will ignore these details here. Taking 0.7 million dollars from a person who owns 2.4 million dollars means taking about a quarter of his wealth.
Several questions need to be answered. Will such a tax lead to negative effects on the economy to an extent that makes it difficult to justify ? And if such a tax were to be imposed, over what period of time should the very rich Americans be required to pay this kind of tax ? Since wealth exists in many different forms like real estate, luxury yachts, private jets, gold, stocks, bonds and cash, it becomes a difficult question to answer. One cannot sell one quarter of a house to pay a wealth tax. Such logistical difficulties may well have to be considered if one were to tax wealth and not just income. For sure, this tax cannot be extracted over only a few years. How about 10 years ? That would be just enough to make sure that the projected 24 trillion dollars projected figure for the public debt at the end of another decade will be brought down to a decent and manageable 10 trillion dollars. The rich will get enough time to convert their non-liquid assets to liquid form. They will also get the opportunity to expiate for the fact that they did not pay enough taxes while the public debt ballooned to a whopping 14 trillion dollars, and is now going towards 24 trillion dollars over the next ten years. The US national annual GDP is about 14 trillion dollars. Over 10 years, it adds to 140 trillion dollars. Since the rich will have to unload 14 trillion dollars of assets over 10 years to pay this kind of wealth tax, it will lead to a 10% extra supply pressure, for lack of a better term, in the economy. That is likely to be excessive in that it can lead to severe downward pressure on prices. It can prolong recessions and there is a danger that it can induce recessions during normal times. How about 20 years ? This will lead to a 5% extra supply kind of situation, and can also lead to severe downward effect on prices. Spreading such a tax over 40 years is likely to have negligible effects on the economy. But, that is to long a time period to have any meaningful impact on America's ability to deal with the debt situation.
America's ability to speedily pay down its debt may well depend on devising a workable scheme for taxing wealth instead of income. The discussions above indicate that balancing the need to pay down debt and the need to maintain a stable economy may well become a difficult one if one tries to use such a wealth tax.
by C. Jayant Praharaj
Let us make a simple calculation. According to some reports, 5% of Americans own about 95% of America's wealth. Once again, we are distinguishing wealth from income. In a low upward and downward mobility environment, income and wealth should track each other over long periods of time. In a high upward and downward mobility environment, wealth may not track income. 5% of the American population is about 20 million people. Let us assume 50 trillion dollars as the total wealth of America. This number may not be very accurate. It may be 75 trillion dollars or it may even be 100 trillion dollars. The reader can find out the accurate number. The exact number is not that important for our examination. 95% of 50 trillion dollars is about 48 trillion dollars. If 20 million Americans at the top of the economic ladder own 48 trillion dollars of wealth, then on an average, they own about 2.4 million dollars per person. There are people like Bill Gates who own several billion dollars. For our argument, let us take the average number. If one were to try to repay 14 trillion dollars worth of public debt by taxing the wealth ( not just income ) of these 20 million Americans at the top, one would need about 0.7 million dollars from each of them. In an actual scheme, billionaires would pay more than millionaires, and so on and so forth. We will ignore these details here. Taking 0.7 million dollars from a person who owns 2.4 million dollars means taking about a quarter of his wealth.
Several questions need to be answered. Will such a tax lead to negative effects on the economy to an extent that makes it difficult to justify ? And if such a tax were to be imposed, over what period of time should the very rich Americans be required to pay this kind of tax ? Since wealth exists in many different forms like real estate, luxury yachts, private jets, gold, stocks, bonds and cash, it becomes a difficult question to answer. One cannot sell one quarter of a house to pay a wealth tax. Such logistical difficulties may well have to be considered if one were to tax wealth and not just income. For sure, this tax cannot be extracted over only a few years. How about 10 years ? That would be just enough to make sure that the projected 24 trillion dollars projected figure for the public debt at the end of another decade will be brought down to a decent and manageable 10 trillion dollars. The rich will get enough time to convert their non-liquid assets to liquid form. They will also get the opportunity to expiate for the fact that they did not pay enough taxes while the public debt ballooned to a whopping 14 trillion dollars, and is now going towards 24 trillion dollars over the next ten years. The US national annual GDP is about 14 trillion dollars. Over 10 years, it adds to 140 trillion dollars. Since the rich will have to unload 14 trillion dollars of assets over 10 years to pay this kind of wealth tax, it will lead to a 10% extra supply pressure, for lack of a better term, in the economy. That is likely to be excessive in that it can lead to severe downward pressure on prices. It can prolong recessions and there is a danger that it can induce recessions during normal times. How about 20 years ? This will lead to a 5% extra supply kind of situation, and can also lead to severe downward effect on prices. Spreading such a tax over 40 years is likely to have negligible effects on the economy. But, that is to long a time period to have any meaningful impact on America's ability to deal with the debt situation.
America's ability to speedily pay down its debt may well depend on devising a workable scheme for taxing wealth instead of income. The discussions above indicate that balancing the need to pay down debt and the need to maintain a stable economy may well become a difficult one if one tries to use such a wealth tax.
by C. Jayant Praharaj