Tax (or not) the rich?

The news article of the past 24 hours was the leaked taxes of billionaires which showed that they do not pay much in taxes. This is not news to anyone with a background in taxes or finance but of course, it’s an eye popping headline that has gone viral.

As part of this news report, many news outlets and reporters have taken this information and started publishing a “True Tax Rate”.

I want to be clear in that this is misinformation and misleading. What these 4 billionaires have in common is their appreciation in wealth is due to appreciation in stock which is not taxed until you actually sell that stock. Effectively, what people are arguing by reposting this is that we should be taxing people on their unrealized gains in stock. This is a tax policy (aka mark-to-market) that makes no sense.

You don’t realize any cash until the sale. Why should you be taxed on something you haven’t locked in? If we wanted this policy, we’d also have to apply it to homes and real estate. No one should be taxed on appreciation of their home prior to selling it.

Now before people come after me, I’ll address the elephant in the room that I am in favor of taxing the rich. I simply just believe in effective tax policy that encourages behavior rather than adding more patches on the sinking ship that is the tax code.

So what is my solution if I don’t believe in taxing unrealized gains? Surprisingly, I believe in a wealth tax. Albeit, one that makes more sense and encourages good behavior.

I would love to see a wealth tax imposed on the ultra wealthy that allows the ultra wealthy to avoid this tax by deploying their capital into charitable organizations. Let’s say we implement a 1% wealth tax on those 4 billionaires above. Warren/Jeff/Mike/Elon would be able to avoid this 1% wealth tax by donating 1% of their wealth to charitable causes instead.

If they don’t believe in the government allocating their capital correctly, then they can choose to pick who can. Even the staunches supporters of capitalism can get behind this. The idea of capitalism is to deploy capital and well we’re encouraging that with this wealth tax.