Let's Fight for Tax Justice to Achieve Inclusive Growth

The current tax system is rigged against the working class in favor of protecting the wealth of the top 1%. But it doesn't have to be this way. Imagine a government funded in full off the excess of the overwhelming successes of our wealthiest citizens, a society where the exceptional achievements of a few can significantly and routinely raise the standard of living for everyone across the board. This is what economists call inclusive growth. And we can achieve this with a slight — but significant — tweak to the tax code.

Figure 1 — a 15% wealth gains tax on the top 1%.

The economy is a vast, intricate network of millions of individuals that buy and sell goods and services from each other. Think of a giant web of circles, connected organically by lines of volition. Each transaction is a mutually-agreed-upon exchange of value. For example, I can trade $6 for a carton of eggs. Most people see money as inherently valuable, but I believe that money is a resource. Before I spend the $6, it could be used to buy anything, whether that be a carton of eggs, 24 gumballs, or a jpeg of a monkey with a beanie hat. But the money only becomes tangibly valuable when it is realized to buy something that is valuable.

For a vast majority of people, this is a distinction without a difference, because we all have a plan to use the money to improve our lives — for groceries, gas, entertainment, school, a car payment, insurance, rent, a house, a wedding, raising a family, that next vacation, retirement — basically, to finance the American Dream while being able to afford the cost of living and discretionary luxuries.

But there are some extraordinarily wealthy people who are sitting on millions and millions of dollars of wealth, with no plans to use it. And I don't think it's out of greed or malice; it's simply the case that past some certain point, there's no longer anything to buy. The biggest lie they teach you in economics class is this concept of "infinite demand." If billionaires really did have infinite demand, then I assure you they wouldn't be billionaires anymore.

And it's not even "the economy of the 99% vs. the economy of the 1%." A vast amount of the wealth in the top 1% has no realistic expectation of ever being used for anything, so it is, by definition, not in the economy. If wealth is being hoarded, then it can't be used in the economy to impart realized, tangible value into the lives of millions of Americans.

In a healthy economy, the money moves around. Yes, we all own money, but there is a social contract to it, too: Make sure you have a plan to realize the value of that money. I'm not about to collect my paycheck at work, then dig a hole in the ground and bury it under 6 feet of dirt and leave it there for 100 years.

According to the Bipartisan Policy Center and the Congressional Budget Office, 84% of all federal tax revenue for fiscal year 2024 came from income and payroll taxes. In my mind, it's not the amount of money flowing into the government that's the problem, as the taxes are primarily used to promote the general welfare and provide for the common defense of the United States (Article I, Section 8), which is practically the sole mission of the U.S. federal government (Preamble to the Constitution). The problem arises from the fact that income and payroll taxes take away funds that would otherwise be used in the economy to improve workers' individual lives. Under the current tax system, serving the common good of the United States requires a tax on workers.

And while this has been the case for over a century, it does not have to be that way any longer. By shifting the burden of tax from the workers to the wealthy, we can increase take-home pay for workers and fund federal programs to serve the people of the United States. Why do we tax workers up front, when we could instead wait for some of them to become multi-millionaires or billionaires, and tax them then? A wealth tax doubly serves as an incentive for the rich to use their wealth in the economy, and more broadly punishes economic stagnation while rewarding productivity.

Maybe it used to be the case that high wealth meant high income. But these days, there are trillions of dollars of wealth that are simply being hoarded, while even the highest earners in America would need to work for centuries to catch up. It should easily be possible to fund the government entirely from excessive wealth from the richest among us, which would create a tax system that lauds and rewards people for making it big instead of penalizing productivity. Achieving an astronomical net worth in America is a remarkable, exceptional achievement. And it's worth noting that if we were to implement a wealth tax, then the existence of billionaires could not be construed as a policy failure. To the contrary, we would benefit from billionaires who generate an outsized proportion of the wealth tax revenue. (Please read my thoughts on what I believe to be the real policy failure.)

In summary: Hands off the working class; we'll tax the rich, and they'll like it!

As an engineer, and not a lawyer, I cannot, for the life of me, understand why people collecting their direct deposits on pay day can easily be subject to a federal income tax on realized income, and the total value of Harlan Crow's properties and land can be taxed indirectly through a municipal split-rate tax, and yet Elon Musk's net worth cannot be taxed in any way other than a direct wealth tax, which is made completely unviable due to the apportionment requirement in Article I, Section 9 of the Constitution, a requirement that wasn't even a good idea in a 1780's agrarian society. It's almost by design that the tax code is rigged against ordinary people to protect the ill-gotten gains of the CEOs who ship jobs overseas for profit. Why is it so easy to tax workers' income but so difficult to tax wealth? If it were completely up to me, I would allow indirect taxes to be applied against the total net worth of the top 1% via wealth taxes, because I view unrealized wealth as a resource with a social contract and therefore see no meaningful distinction between net worth, property value, and land value for purposes of taxation.

And yet, while a constitutional wealth tax would be the holy grail of just and equitable tax law, it would probably be easier to make a strong, viable statutory argument that a wealth gains tax is constitutional. So for the time being, I think it makes the most sense to pursue that.

For individuals with a high net worth, any increase in net worth shall be treated as taxable income under the Haig-Simons definition of income — a framework consistent with the 16th Amendment and thus not subject to the apportionment requirement for direct taxes under Article I, Section 9 of the Constitution.

We should let the economists of today define what income is, not a financially illiterate 5-4 Supreme Court majority from over 100 years ago. In the Eisner v. Macomber decision, the Supreme Court made a ruling that directly contradicted the 16th Amendment by deciding that not all income is taxable. It was a blatant and flagrant authoritarian overreach of judicial power that invalidated the 16th Amendment with just 5 unelected votes, instead of the overwhelming supermajority of elected officials nationwide that would have been required to pass a new constitutional amendment. Furthermore, the Eisner v. Macomber ruling undermines the original intent of the 16th Amendment, which was to make it easier for the government to promote the general welfare and provide for the common defense — the very spirit of the Constitution itself.

If we choose to statutorialy define wealth gains as taxable income, then we can fight decades of wage stagnation to fund real tax relief for millions of working people by hiking taxes on the appreciation of the unrealized wealth of the top 1%. And we can do such a tax maneuver with only a simple majority in the Senate and a cooperative president.

And in the event that a wealth gains tax gets passed into law, this would place the onus on the Supreme Court if they wanted to make a ruling that would so obviously undermine the general welfare of the United States by revoking newfound economic freedom for millions of families to protect the unrealized wealth of a few billionaires.

It is far past time that we overturn Eisner v. Macomber, not only so that we can infuse an extraordinary amount of unrealized value into the lives of millions of Americans, but also so that we can completely and permanently defuse, on a legal and structural level, the most notorious and long-standing point of contention in modern politics — the false choice between the common good of the United States and the individual economic freedom of workers.

Come on! We live in the 21st Century! ¿Por qué no los dos? We can easily fund programs that serve the people of the United States while reducing income taxes for millions of workers; we really could have it all if we would just allow ourselves to — yes — tax the rich!

PDF: Wealth Gains Tax Constitutional/Political Analysis

The extraordinarily wealthy want finance to feel complicated and inaccessible to ordinary people. But at the end of the day, it's just money moving around. We already track ordinary workers' incomes through W-4's for purposes of collecting income taxes. So any attempt for the wealthy to move their money around to avoid a wealth tax must have a clear paper trail — and if it doesn't, it starts looking less like tax avoidance and more like institutionalized money laundering.

The go-to solution for cracking down on tax cheats seems to be increasing funding to the IRS. But instead of attempting to start a multi-billion-dollar arms race between the billionaires and the IRS, it would be far easier, cheaper, and effective to find a Senate parliamentarian that would allow for the imposition of a 6-month prison sentence to punish wealth gains tax evaders, as that would not only be copacetic with the purpose of a budget resolution, but also directly increase revenues by reducing tax evasion. We should surely allow a bill that imposes new taxes to include mechanisms that can enforce the tax. Furthermore, there is no good reason why it is perfectly legal to enforce taxes by throwing billions of dollars at the IRS, but improper to enforce taxes by imposing a minimal prison penalty. Of course, in the case that this is adequately popular, we may be able to avoid the Byrd Rule procedural nonsense entirely and send this through regular order, along with the 6-month prison penalty.

The specific policy I'm envisioning is as follows: we impose a wealth gains tax on the top 1%, and the tax revenue would fund an instantaneous tax credit to be applied against the income taxes for workers. Yes, this is exactly what it sounds like: a plan to force the wealthy to pay their fair share in taxes.

Twice a month, we would reset the wealth basis of all those in the top 1%. If the net worth increases, the appreciation would be taxed at the wealth gains tax rate. If the net worth decreases, there would be no tax applied and no tax write-offs for realizing a wealth loss. We would use W-47 forms to manage compliance with the tax. (Why 47? Ask Mitt Romney 🙂).

One could argue that the wealth gains rate should be higher than the highest marginal income tax rate (for example 40%), but as this would be a new system, it would probably make sense to start small. It would also be beneficial to tie the tax rate to the inflation rate (Consumer Price Index) to combat price gouging. I was thinking we set it to either 15% (to match the current long-term capital gains rate) or 5 times the latest year-over-year CPI, whichever one is larger. In other words, I propose a minimum wealth gains tax of 15% on the top 1%, but have the rate increase in the case that inflation exceeds 3%.

For most W-4 employees, the credit could be administered through a W-53 form to directly increase take-home pay by reducing federal income tax withholding. There would have to be separate accommodations made for self-employed individuals.

Based on quarterly data on the household wealth distribution from the Federal Reserve, the wealth of the top 1% generally increases quarter-over-quarter, but can briefly decrease during economic downturns. So as long as this tax credit is tied to wealth gains taxes, and not wealth taxes, there would be some level of volatility (although tying the tax rate to the inflation rate might help during extended periods of high inflation).

I coded a quick simulation in Python based on the wealth distribution data from the Federal Reserve, and I found that there could be a significant amount of annual tax relief, as pictured in the graph below. I assume a 15% base rate that increases during high inflation (as defined above) and 170 million workers. For years with high inflation, I assumed 4% inflation for 2008, 5% inflation for 2021, 8% inflation for 2022, and 4% inflation for 2023 (source).

Figure 2 — a graph showing simulated annual per-capita tax relief based on publicly available wealth distribution data.

It is true that wealth gains taxes can only generate revenue if the rich get richer. So for the cynics who think they'll just avoid the tax, I'll say this: What if the easiest way for the wealth of the top 1% to decrease is for the wealth to actually trickle down? And if it doesn't trickle down, then we can use this wealth gains tax to force it to. The only way for a wealth gains tax to fail to produce tax revenue in the long run would be for a vast majority of all wealthy Americans to fail to get richer or break the law. And not only are rich people really good at getting richer (even in the wake of a once-in-a-century global pandemic); they also would probably prefer to pay taxes that they could easily afford instead of risking a 6-month prison sentence that would threaten their lavish lifestyle.

GitHub: My Python Simulation