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Elizabeth Warren Will Have To File For Bankruptcy If She Passes Her Wealth Tax Plan

We’ll talk about Elizabeth Warren’s proposal in Part 1 and specifically how it will bankrupt her if enacted in Part 2. Both are included below.

Elizabeth Warren’s wealth tax plan is designed to tax all assets above $50 million at 2% and all assets above $1 billion at 3%. Unlike the estate tax, which has loopholes, this tax is designed to close them all up.

The only exemptions are $50,000 personal property exemptions, which I presume was designed so that things like furnishings and regular clothing and electronics wouldn’t have to be counted. Some cars could also fall into this category.

You must pay on all your assets above $50 million. This includes but isn’t limited to stocks, bonds, real estate, private businesses, homes, and artwork.

If you’re an artist who has sold some of your own paintings for a lot of money, you could be taxed on paintings that you haven’t yet sold if they’re worth above the threshold. If you don’t have enough money to pay those taxes you would be forced to sell some of your prized artwork that you created, or you’d have to take out loans against the artwork.

A more common occurrence is for someone who owns a privately held business. Let’s use the example of a founder of a silicon valley tech firm. The firm won’t be generating profits for several years, but it is so innovative that the firm has a huge market value. The founder has to either sell shares to pay his wealth tax or he has to borrow money to make the payments. Also expect venture capital to decrease since many of the wealthy who are involved in funding these businesses to invest more of their money in assets that provide consistent returns like stocks and bonds. Founders may be forced to sell the privately run business to large publicly traded multinational firms and can even lead to anti-trust issues as these large publicly traded companies grow ever larger.

I’m not sure that she wanted to help Goldman Sachs and other Wall Street firms increase lending to the wealthy, but she might just get it. Hopefully, we don’t see any kind of debt crisis because of enhanced lending to the wealthy who may borrow large amounts over many years to pay for their taxes.

Anyone affected by the tax has the option of deferring their taxes for 5 years. (It’s unclear whether you can delay each and every year’s payment for 5 years). Nevertheless, you will pay interest on those taxes. The plan doesn’t specify how rates will be set. If they are low then everyone affected will defer payment, and if they are high we’re back to the previous problem of people having to sell off or borrow against their property.

However, her plan does create a major loophole. It allows for the deferral of taxes if they would hurt a business or if a taxpayer is facing unusual circumstances. It doesn’t say whether they would be charged interest and what the interest would be. The ability to defer indefinitely would be determined by the IRS. Expect record breaking corruption to ensue. Everyone affected will try to jump into this loophole and will use any means available to influence the IRS into granting them a way out of their taxes.

Another issue is the fact that the plan isn’t indexed for inflation so that in later years more people will be paying it who are less wealthy than those who would pay it currently.

Yet another issue would occur if you had to withdrawal money from a retirement account early and pay a tax penalty for it, merely so that you could use the money to pay the IRS for your wealth taxes.

If you sold assets outside of a retirement account to pay your wealth taxes you’d very likely pay capital gains taxes on what you sold in addition to your wealth taxes.

The biggest problem by far is personality rights and copyright rights. Here’s how this works.

Personality rights are the rights to a person such as the ability for Donald Trump to put his name on ties or for Michael Jordan to put his name on Jordan sneakers. Copyrights are the rights to things people create such as Harry Potter by J.K. Rowling or Star Wars By: George Lucas.

The IRS considers both forms of rights as part of estates for purposes of estate taxes and Warren’s tax plan claims to tax all assets including both of these rights.

A tax on the wealth of these rights is different than a tax on the income derived from them because wealth is based on either the income that can be generated from something or how much people are willing to pay for something like a collectible.

Therefore the wealth tax would be based on the potential to monetize these rights. If George R. R. Martin’s Game of Thrones can keep generating large amounts of money from new books than he can be taxed on possible future books even if he doesn’t want to write them. After all he could sell the copyrights and someone else could make them. It’s a TV show too, but it could be made into a movie so let’s tax him on the estimated value of that potential movie. What if he writes another series? Even if he doesn’t he has the potential to monetize it.

George Clooney can show up to movies and collect large checks, therefore he should be taxed for that innate wealth even if he doesn’t make the movies. Taylor Swift could sell out concerts 365 days a year with no time off and so could Beyonce. They have the star power to do so but they aren’t maximizing it. They sign recording contracts to produce multiple albums, since it’s believed that most of their songs will be profitable. Barack Obama doesn’t endorse products, but he’s popular enough that he could. Furthermore, so could his wife Michelle Obama. Even Bob Dole endorsed Viagra. They would be taxed for the value of their brand even if they’re not using it. Jay Leno quit a high earning late night talk show to focus on a car TV show. He could still come back and make money so he’d be taxed on that potential. If a high-powered CEO wants to retire he’s not going to be earning money but he has the business ability and as a form of human capital it was worth millions to the company, therefore he’s very wealthy, even if he were to give away all of the money that he was paid as an executive.

The reason why we don’t really see these problems with the estate tax is because they occur once in a lifetime (literally at the end of life). Therefore wealthy heirs can sell off assets if they need to. And it’s not like they made the money themselves so there’s less sympathy for them. If anything they could just sign over a portion of the rights to the IRS. It’s a bit harder to do that when you have to pay a percentage of the value each and every year. Furthermore people can’t make more copyrights when they die and personality rights tend to be figured out within a few years of death.

Part 2: So how does Elizabeth Warren go bankrupt?

In Warren’s case it hinges mostly on personality rights. We can assume that she has about $10 million give or take although it’s probably a low estimate. She already is widely seen as somewhat of a finance guru to many Americans who support her (she was a professor dealing with financial matters at Harvard). She could make a lot of money being one like a Suze Orman or Dave Ramsey. Furthermore, she would probably have to be president to get her wealth tax passed. As president she’d be an even more noteworthy figure. Presidents make incredible amounts after leaving office from speeches and book deals. Combine this with being a finance guru and she could easily get radio and TV shows. What about her biographical rights? Let’s make it easy and say that her full personality rights would give her a $150 million net worth. We can also apply the same exercise with Bernie Sanders who has raised hundreds of millions from inspired Americans for his campaigns. He’s very marketable. They would pay a 2% tax on the $100 million above the $50 million threshold or $2 million a year in addition to other taxes. Bernie Sanders has some debts and at most a few million of other assets. Unless he started using his personality rights he’d be bankrupt by the end of a first presidential term. Elizabeth Warren paid $300,000 in taxes 2017. She’d pay $2.3 million that year if she had the same income under her plan in addition to any capital gains taxes she’d incur from selling assets. She’d have gone through $10 million in wealth taxes by year 5 so she’d be a 2 term president or out of office putting together a book deal or giving speeches or getting a TV show. Or maybe they’d be asking the IRS for special treatment for deferrals.

It’s not to say that a wealth tax of some sort couldn’t work and might actually be a good thing. It can work, but this plan by Elizabeth Warren wasn’t completely thought through. I think it’s safe to say that a President Warren would modify or drop this plan the moment she watches her life savings disappearing before her eyes.

So will you be paying these kinds of taxes? Even if it’s passed you probably won’t, but to be on the safe side don’t get fifteen minutes of fame otherwise you might be paying fifteen years of taxes.

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