Summary. This is a straightforward proposal that would balance the U.S. federal budget in 5 years and reduce the national debt to zero in 25 years or less. Since these are objectives of virtually all political parties and all persons of good will, it should have universal appeal. It’s also simple, understandable, and eminently fair.
This proposal would eliminate the estate tax and replace it with an annual tax of just one percent on the net worth on those individuals with holdings of more than $1 million dollars. It would generate approximately $45 trillion in new tax revenues over 30 years, while the net worth holdings of those affected would nevertheless continue to grow from $43 trillion to $309 trillion during the same time period. Thus, the national debt would be eliminated without causing a burden on anyone.
Background: Our national debt is the sum of our federal budget deficits. It is currently growing faster than our ability to service it. Our ability to service debt is a function of our tax revenue sources, our national spending, and our Gross Domestic Product (GDP). Debt is better understood as a percentage of GDP. In 1980 this percentage was 30%, and today it is 90% ($13.2 trillion/$14.684 trillion). This percentage is higher than that of most of the rest of the countries in the world. According to economists Reinhart and Rogoff, this ratio is now at a critical level. By their estimates GDP growth falls by one percent when the debt-to-GDP ratio reaches .90; and by considerably more above that point.
[1] We currently spend about $200 billion per year in interest on the national debt. Only Canada and Japan surpass the U.S. in debt-to-GDP ratios among the major industrialized countries,
Note: “Net worth” and “net wealth” are used synonymously in this report. Both refer to private assets minus private liabilities.
Wealth is currently taxed via the estate tax. Americans own net assets of approximately $55 trillion, and the government receives approximately 0.1 percent per year of that amount. $56 billion was collected in FY 2007year from household net wealth.
[2] The estate tax, however, is invoked only following the death of the owner of wealth, or approximately once every 30 years per household. Its invocation follows this chronology: We die at an average age of 75, and we leave our wealth to our heirs. Our heirs are typically our children who are approximately age 45 when we die. They, in turn, follow the same generational pattern and procedures when they die, hence the 30-year interval between tax payments. The method behind the present estate tax calculation is essentially to exempt the first $1 million per individual inheritor, and tax the remainder at a rate between 35 and 55 percent of the balance depending on individual circumstances. But the net annual tax revenue from estates is just 0.1 percent of all net wealth.
Many wealthy people and members of Congress want to eliminate the estate tax. They assert that it causes heirs to have to sell family businesses or family farms just to be able to raise the cash to pay the tax, while it produces unemployment among employees. Although I could find no evidence in support of these concerns, both concerns would be eliminated altogether with this proposal.
This Proposal: We can eliminate the estate tax and replace it with an annual tax of one percent on net worth after giving everyone a $1 million annual exemption. Such a tax would produce $5 trillion in new revenue in the first 10 years, and a total of nearly $45 trillion in new revenue over 30 years.
A. Minimal Burden: Since 1950 our net worth has grown at a compound annual growth rate (CAGR) of 7.8 percent.
[3] Net assets would still grow at an annual rate of 6.8 percent after paying this tax. Nobody therefore would have to sell a business or a farm in order to pay it. Further, since the first million dollars would be exempt from taxation, this tax would only apply to approximately the top 5 or 10 percent of taxpayers, much like the present estate tax.
B. Economic Benefits. Many economic benefits would flow from this proposal. All of them would free up money for other important issues and programs such as job retraining; developing renewable energy sources; for a variety of research and development programs in health care and space; or for shortfalls in Social Security and Medicare.
1. No More Interest on Debt. We currently spend about $200 billion in interest on the national debt, more than one-half of which goes to foreign countries. We could, once again, become a net lender rather than a net borrower by reversing the stream of dollar flows into and out of the country.
2. Stronger Dollar. One of the key factors behind the value of the international dollar is the percent of our budget that must be financed. The larger that percentage is relative to our trading nations, the lower the dollar’s exchange rate, and vice versa. The same conditions prevail for our debt-to-GDP ratio. Balancing the budget and reducing our national debt to zero would cause the dollar’s exchange rate to rise significantly over time while strengthening it in world trade.
3. Lower Inflation. The cost of imports would fall, especially oil, thus reducing inflation. Inflation is effectively a regressive tax, therefore the typical American would benefit most. Additional benefits would flow throughout the economy in lower inflation across all goods and services, leading to more employment, higher incomes, a reduction in the need for government transfer payments for unemployment and related programs.
4. Social Benefits. There are many social issues that are linked to unemployment, lack of income, and lack of opportunities. Although this proposal does not address them directly, each would improve from a growing, robust economy that is free of debt. Among them are: crime rates, imprisonment rates, mental illnesses, teen pregnancies, life expectancies, obesity rates, math and literacy levels, drug addiction rates, homicides, trust, and social mobility.
[4]
Projections. At a CAGR of 6.8 percent, taxable net worth would grow from a current level of $38 trillion to approximately $309 trillion in 30 years, an increase of 620 percent. The wealthy would still realize a greatly expanded increase in their net wealth without experiencing a burden (see attached data projections).
Growth Multiplier. The national debt is currently growing at about 5 percent per year. This proposal assumes that this rate of increase will gradually fall to a zero growth rate in the next 5 or 6 years. This assumption means it will take deliberate efforts on the part of Congress, and normal sacrifices on the part of other individuals, to reduce the debt growth rate independently from this proposal. There would still be a shared burden for total debt reduction.
Tax Revenues and Debt Reduction. The tax revenue from this proposal would increase from $380 billion the first year to $3.5 trillion in 30 years. Total taxes collected would total $45 trillion. If this amount were all targeted to debt reduction, the national debt would be zero by 2032 (see attached data).
Implementation. Each taxpayer would be required to complete a Net Worth Worksheet and file it with his/her income tax return. Net worth statements are common and can be produced much easier than most IRS schedules and current attachments to present income tax returns.
Data in the Attached Spreadsheet. All the numbers in the attachment are in the public domain and projections are based on simple arithmetic calculations. They hinge on the assumed Growth Multiplier for deficit growth and on past growth rates in net worth expansion. This means that the economy, savings, and investment will continue to grow at average past growth rates, and reasonable efforts will be made to first slow, and then stop, expanding the budget deficit growth rate independently from this proposal. The rest is simple addition and subtraction.
|
U.S. Budget and Revenue Sources for 2008
|
|
|
|
|
|
|
|
|
Source
|
% of Total
|
Tax
|
Total Pool
|
Effective
|
|
|
Budget
|
in $Bil
|
in $Bil
|
Tax Rate
|
|
Indiv. Income Tax
|
45.4
|
1,450.1
|
12,088
|
12.00%
|
|
Corporate Tax
|
12.1
|
410.7
|
1,373
|
27.75%
|
|
Employment Taxes
|
35.7
|
898.1
|
9,359
|
8.70%
|
|
Excise Taxes
|
2.7
|
67.3
|
*
|
*
|
|
Estate Tax
|
.09
|
23.7
|
50,708
|
0.05%
|
|
Other
|
4.0
|
2.0
|
2
|
1.11%
|
|
Totals
|
100.00
|
2,524.7
|
70,523
|
--
|
Source: CBO
Projections based on historical CAGRs
The first table shows that net worth is the largest pool of assets, while it is taxed at the lowest rate of all tax sources. It is also the only pool that could produce the $30 trillion in new revenues needed to eliminate the national debt to zero in the next 30 years.
The graph shows that the new tax would be imposed on the future growth in net worth of the wealthiest individuals. Their net worth would still grow from about $38 trillion to more than $300 trillion.
Discussion. The purpose of this proposal is to balance the federal budget and to reduce the national debt to zero. It would accomplished by first limiting budget deficits to no more than an average annual increase of $1 trillion dollars, by eliminating the estate tax, and by replacing it with a tax on household net worth above $1 million per person..
Several economic principles apply in making this proposal viable. The first is that by taxing only part of future asset growth, it would produce the least possible burden on those taxed. That’s because the marginal utility of assets is least at the highest levels. Economists call this principle the Diminishing Marginal Utility of Money or Wealth. Put another way, the last dollar of income that flows to the wealthiest, has the least effect on their actions, for better or for worse.
Second, the tax that is currently imposed on estates is perceived as high because it occurs at a long time interval between assessments. Changing it to an annual tax would result in a much lower assessment without the prospect of forcing the sale of family businesses or farms. It would be collected from those who have benefited most from the past actions of government or business whether from taxes, opportunities, inheritance, good fortune, or from the efforts of self or others. This tax, moreover, could be eliminated after 30 years...
Objections:
1. Objection: The first objection that comes to mind is this: If this proposal is so simple, why haven’t legislators, political parties, think tank members, professors, and private researchers proposed it?
Response: Conceptually, almost anyone could have—and perhaps many already have—thought about this solution to our national debt problem. But when there is a perceived opposition to a proposal, the originator is reluctant to offer it, especially if it is within his scope of activities to do so. This proposal is simple, however, only in its formulation. Convincing anyone to pay a tax they are not currently paying--even when it would benefit everyone with no visible negative effects--could be a difficult “sell” even by gifted persuaders. Eliminating the estate tax simultaneously would make the task of persuasion much easier.
2. Objection: The burden for balancing the budget and reducing the debt to zero would fall entirely on the wealthiest. That is inherently unfair.
Response: This observation is not true . Reducing our national debt during the next 30 years to zero will require sacrifice on the part of all taxpayers. But there is only one source of funds for making the reductions of the magnitude necessary to bring our debt down to zero. The distribution of wealth is skewed so markedly in favor of the top 5 to 10 percent that it is the only source of funds that can be tapped without placing a huge burden on anyone. The wealthiest 10 percent now hold $43 trillion in net worth. When this proposal would expire in 30 years, they would hold $300 trillion in net assets. The other 90 percent of taxpayers would love to have that burden.
A Visualization: It’s virtually impossible to show graphically the huge disparity that exists in private net worth holdings among all Americans. But it can be visualized this way. Visualize all wealth converted to $100 dollar bills. $1 million in one hundred dollar bills would create a stack about 40 inches high. Therefore:
If all individual net worth holdings were converted into stacks of one hundred dollar bills, and each stack were laid in ascending order along a football field of 100 yards, here is what we would see from a side view: For the first 50 yards there would be no money at all. That is because the net worth of the lowest 50 percent of Americans is zero. And that is because their debts are equal to or greater than their assets. At about 70 yards down field, the stacks would be about 4 inches high, representing about $100,000 in individual net worth holdings. Only the last 10 yards would show rapidly rising stacks until we reached the last wealth holder. This person holds nearly $55 billion in net worth. His stack would be 33.5 miles high! ($1 million = 1 meter; $1 billion = 1,000 meters; and $55 billion = 55 kilometers, or 33.5 miles). Tax this stack . 1 percent per year for 30 years while it is growing at 6.8 percent per year, and at the end of 30 years it would still have grown to more than 240 miles high).
3. Objection: The wealthy could avoid paying part or most of this tax by transferring ownership of their assets by legal means such as by establishing various family trusts, setting up tax avoidance corporations just for that purpose via offshore accounts, etc. while retaining control over the same assets.
Response: This is a legal issue that can be handled by lawyers. The Net Worth Statement would have to include assets owned or controlled--wherever they are located, and irrespective of the how they are titled.
4. Objection: Many individuals are “asset rich” and “income poor” such as a farmer who owns a $10 million farm, but has only $50,000 of annual income. This proposal would force him to sell off assets just to pay the tax.
Response: Any farmer with $10 million in assets and only $50,000 of income has a serious problem with the efficient use of his assets. His return on assets (ROA) would be substantially below the 3-4 percent return among all farmers. With effective counseling he could raise his ROA to be able to pay a modest one percent on net wealth. This proposal would not force him out of business, but it would force him to organize and use his assets more efficiently.
Concluding Comments. All objections to this proposal must come face to face with these facts and probabilities:
Ÿ We are at a critical crossroad in our financial well-being. Choosing to reduce our national debt is the pathway to financial health. Ignoring our growing debt problem is the pathway to financial disaster. At debt-to-GDP values greater than .90 will mean that debt will become such a drag on the economy that we can no longer grow our way out of our debt situation. Beyond this point, there is no solution to our debt issue. GDP must be able to grow in order to produce the levels of wealth necessary to reduce the debt. Doing nothing therefore is not a rational option.
- There is no other source of revenue large enough to reduce our debt to zero in the same time period without causing a huge burden on almost everyone.
- Private net worth is currently taxed at the lowest rate of all sources (0.1 percent per year), yet it is the largest pool of assets at $55 trillion.
- Most net worth is inherited, not earned. Moreover, U.S. net worth is skewed more severely in the U.S. than in any industrialized country. The U.S. wealth Gini Coefficient is .83.[5] A tax of $500 million on someone with $55 billion would not be felt of even known without a tax consultant to inform the holder.
- Taxing net worth would impose the least of all burdens because it would fall only on the future growth of the net assets owned or controlled by the wealthiest persons, yet it would not be felt even by them because their wealth would continue to grow from $43 trillion to $300 trillion, or by approximately 650 percent
- The benefits of this proposal could restore the vitality of our economy far into the future. The notion of burdening our children and grandchildren with mountains of debt would become just a footnote in the pages of history.
- The projections in this proposal are all based on Federal Reserve sources during the time period 1950 to 2009. While there are no assurances that future growth will be equal to the past, it also could be higher.
|
|
|
A
|
B
|
C
|
|
D
|
|
|
E
|
|
F
|
|
|
NAT'L DEBT
|
Deficit
|
Net Household
|
|
Net WorthTax
|
|
Taxable Wealth
|
|
NEW NAT'L DEBT
|
|
|
|
with
|
Growth
|
Wealth
|
|
Revenue with
|
w/After Tax Projections
|
|
Projections
|
|
Year
|
|
Projections
|
Multiplier
|
.7.8%CAGR
|
|
Projection
|
|
|
.6.8%CAGR
|
Using Growth Multiplier
|
|
|
|
(in Tril $)
|
|
(in Tril $)
|
|
(in Tril $)
|
|
|
(in Tril $)
|
|
(in Tril $)
|
|
2010
|
$
|
13.20
|
1.05
|
$55
|
$
|
|
0.38
|
$
|
55.00
|
$
|
13.20
|
|
2011
|
$
|
13.89
|
1.05
|
$59
|
$
|
|
0.41
|
$
|
58.74
|
$
|
13.48
|
|
2012
|
$
|
14.59
|
1.05
|
$64
|
$
|
|
0.45
|
$
|
62.73
|
$
|
13.72
|
|
2013
|
$
|
15.32
|
1.05
|
$69
|
$
|
|
0.49
|
$
|
67.00
|
$
|
13.92
|
|
2014
|
$
|
16.06
|
1.05
|
$74
|
$
|
|
0.54
|
$
|
71.56
|
$
|
14.05
|
|
2015
|
$
|
16.80
|
1.05
|
$80
|
$
|
|
0.58
|
$
|
76.42
|
$
|
14.11
|
|
2016
|
$
|
17.52
|
1.04
|
$86
|
$
|
|
0.64
|
$
|
81.62
|
$
|
14.08
|
|
2017
|
$
|
18.22
|
1.04
|
$93
|
$
|
|
0.69
|
$
|
87.17
|
$
|
13.95
|
|
2018
|
$
|
18.86
|
1.04
|
$100
|
$
|
|
0.75
|
$
|
93.10
|
$
|
13.69
|
|
2019
|
$
|
19.48
|
1.03
|
$108
|
$
|
|
0.81
|
$
|
99.43
|
$
|
13.33
|
|
2020
|
$
|
20.07
|
1.03
|
$117
|
$
|
|
0.88
|
$
|
106.19
|
$
|
12.84
|
|
2021
|
$
|
20.61
|
1.03
|
$126
|
$
|
|
0.95
|
$
|
113.41
|
$
|
12.24
|
|
2022
|
$
|
21.12
|
1.03
|
$135
|
$
|
|
1.03
|
$
|
121.12
|
$
|
11.51
|
|
2023
|
$
|
21.59
|
1.02
|
$146
|
$
|
|
1.11
|
$
|
129.36
|
$
|
10.65
|
|
2024
|
$
|
22.02
|
1.02
|
$157
|
$
|
|
1.20
|
$
|
138.15
|
$
|
9.66
|
|
2025
|
$
|
22.39
|
1.02
|
$170
|
$
|
|
1.30
|
$
|
147.55
|
$
|
8.53
|
|
2026
|
$
|
22.73
|
1.02
|
$183
|
$
|
|
1.40
|
$
|
157.58
|
$
|
7.26
|
|
2027
|
$
|
23.03
|
1.01
|
$197
|
$
|
|
1.50
|
$
|
168.30
|
$
|
5.86
|
|
2028
|
$
|
23.28
|
1.01
|
$213
|
$
|
|
1.62
|
$
|
179.74
|
$
|
4.30
|
|
2029
|
$
|
23.28
|
1.00
|
$229
|
$
|
|
1.74
|
$
|
191.96
|
$
|
2.56
|
|
2030
|
$
|
23.28
|
1.00
|
$247
|
$
|
|
1.87
|
$
|
205.02
|
$
|
0.69
|
|
2031
|
$
|
23.28
|
1.00
|
$266
|
$
|
|
2.01
|
$
|
218.96
|
$
|
(1.32)
|
|
2032
|
$
|
23.28
|
1.00
|
$287
|
$
|
|
2.16
|
$
|
233.85
|
$
|
(3.48)
|
|
2033
|
$
|
23.28
|
1.00
|
$309
|
$
|
|
2.32
|
$
|
249.75
|
$
|
(5.79)
|
|
2034
|
$
|
23.28
|
1.00
|
$334
|
$
|
|
2.49
|
$
|
266.73
|
$
|
(8.28)
|
|
2035
|
$
|
23.28
|
1.00
|
$360
|
$
|
|
2.67
|
$
|
284.87
|
$
|
(10.95)
|
|
2036
|
$
|
23.28
|
1.00
|
$388
|
$
|
|
2.86
|
$
|
304.24
|
$
|
(13.81)
|
|
2037
|
$
|
23.28
|
1.00
|
$418
|
$
|
|
3.07
|
$
|
324.93
|
$
|
(16.88)
|
|
2038
|
$
|
23.28
|
1.00
|
$450
|
$
|
|
3.29
|
$
|
347.02
|
$
|
(20.17)
|
|
2039
|
$
|
23.28
|
1.00
|
$486
|
$
|
|
3.53
|
$
|
370.62
|
$
|
(23.70)
|
|
2040
|
$
|
23.28
|
1.00
|
$524
|
$
|
|
3.78
|
$
|
395.82
|
$
|
(27.48)
|
|
|
|
|
|
Total »>
|
$
|
48.51
|
|
|
|
|
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