® Fall 2019 WO (FOR NOW) PRESIDENTIAL HOPEFULS ARE CAMPAIGNING ON PRO- TPOSALS TO TAX, EACH YEAR, WEALTHY INDIVIDUALS’ AT RATES BETWEEN 1% AND 8%. THE IDEA WILL LIKELY REMAIN A CABLE NEW STAPLE PMS 627 AS LONG AS EITHER REMAINS IN THE RACE. HERE IS THE CONTEXT YOU WON’T OTHERWISE HEAR.

A Tax? Seriously? Is it possible? Is it legal? And what have we learned from the countries where it has been tried before?

BY NICHOLAS J. BERTHA JD, Director of Wealth and Trust Planning WHY ARE WE ASKING? In the same vein, a recent article in Barron’s magazine by Matthew Klein calls a spade a spade in asserting, “It In November of 2018, 24 months ahead of the 2020 is worth stressing that the proposed net worth tax is presidential election, a previously unknown 28-year- not necessary to “pay for” government operations. For old progressive activist and political organizer, in a one thing, the levy is too small relative to existing taxes monumental primary upset, defeated the long-serving, to make much of a difference to the macro economy… number-four ranking Democrat in the House with Its real purpose is to alter the more than 57% of the vote. and, by extension, political power.”5

Many saw this as a generational, ethnic and ideological In any event, Ms. Warren is no longer alone among changing of the guard. That may or may not prove to the presidential contenders in proposing a wealth be the case, but it is becoming clear that it changed the tax. Bernie Sanders now has his own offering and it tenor of the 2020 electoral narrative. Some see it as an is considerably more aggressive than Ms. Warren’s. abrupt pivot in the direction of progressive liberalism. Senator Sanders proposes a graduated annual tax Evidence of that was a subsequent proposal by the on net worth beginning at 1% on wealth above $32 senior Senator from Massachusetts and Democratic million, topping off at 8% above $10 billion. Presidential hopeful, Elizabeth Warren. It is a wealth Not to be outdone, Ms. Warren more recently upped tax - an annual tax of 2% on household assets over1 the ante on her proposal, doubling her top-end rate to $50 million, and 3% on those over $1 billion. Thomas 6%. 2 3 Piketty here we come! Like most early proposals, Warren’s is not terribly According to Gabriel Zucman and Emmanuel Saez, specific (recall Trump’s tax plan could fit on a napkin). two Cal-Berkeley economists who worked with Warren Which “assets”? How valued? (Annual property to draft the proposal, it would affect 75,000 families, assessments? Doll collections? Pension assets? Insurance with about 1,000 subject to the 3% rate, and raise as cash value?) 4 much as $2.75 trillion over a decade. As a benchmark, Sanders’ proposal, on the other hand, is downright one year of federal income tax revenues runs about $3 wonky. It includes provisions for a “wealth registry” trillion. ® 1. It is important to note, that this tax would not affect assets beneath the $50 billion level, only the amount above. 2. in the 21st Century, 2014 3. See also AOC’s proposal for a 70% top marginal income tax rate. 4. Based on original proposal. http://gabriel-zucman.eu/files/saez-zucman-wealthtax-warren.pdf 5. Understanding Elizabeth Warren’s , Matthew C. Klein, Barron’s February 7, 2019. Fieldpoint Private 1 with annual valuations and a 30% audit rate, counts GRAT assets as owned by the grantor, and If a wealth tax was considered assesses an exit tax of up to 60% on those seeking to expatriate to escape the tax. to be a direct tax, that would

Noteworthy is that neither proposes indexing for likely be the end of it. . Recall the Alternative Minimum Tax (AMT), which when introduced in 1969, was supposed to tax that it is a tax on the transfer of assets at death. The only about 150 ultra-wealthy people. By not properly income tax is deemed indirect via a good old fashioned indexing for inflation (no doubt entirely an oversight), constitutional amendment. it would eventually ensnare about four million tax payers. If a wealth tax were to be considered a direct tax, that would likely be the end of it. This is because the constitution requires that a direct tax’s revenues be If we’re going to have to listen apportioned by state according to population. By this definition each state would owe its respective amount to it, we might as well all have based on its population size. Mississippi, for instance, the complete context. would owe only 8% as much as California, purely based on population. However, given the wealth disparity between those states, it is easy to see how it would not be possible for Mississippi residents to AND WHY ARE WE ASKING NOW? contribute, collectively, their apportioned share if the Sure it is way too early to take these proposals seriously, wealth tax were applied equally. and way too early to plan. In any event (sparing you the stroll through the legal So why are we writing this? For one, because this is weeds) the bottom line is that it is likely the courts one of the issues we will see debated for the next year, would deem it an indirect tax, like the income and and that, of course, means innumerable segments on estate taxes, and uphold its constitutionality. cable news and the Sunday political talk shows. If we’re going to have to listen to it, we might as well all have The more difficult question might be how to the complete context. administer it! Recall that it would be an annual tax, not a one timer like estate and taxes. Each It’s also worth noting this is merely the shiniest object household’s net worth would have to be valued each among a slew of other proposals already out there, year. Publically traded securities are one thing, but all of which share the stated intention of reducing how about real estate, family businesses, collectibles inequality. One of these proposals would eliminate and more esoteric assets like carried interest, music the step-up in cost basis of appreciated assets at death. royalties, or, how about, the income interest in a Another would lower the estate tax exclusion from the charitable remainder unitrust! current $11.4 million to $3.5 million, while increasing the top marginal rate to 77%. Another would raise the Today’s tiny, esoteric valuation boutiques would be capital gains tax rate. transformed into titans of the American economy. And what to include in the asset inventory? What BUT IS IT LEGAL? IS IT EVEN about, just for the fun of it, assets in a defective grantor ADMINISTRATIVELY POSSIBLE? trust that are no longer in your estate for estate tax Some argue that a wealth tax would be purpose, but are for income tax purposes. What about unconstitutional on its face, or at best effectively the discretionary principal beneficiaries of that trust, impossible. and on and on. Sounds like a nightmare to me!

Legality, if the truth be told, is not crystal clear. The NOT NEW U.S. constitution distinguishes between a “direct” tax While to many of us in this country a wealth tax is at the federal level (a tax on a person or entity) and something new, it’s really not. It has been around, in an “indirect” tax (a tax on transactions or transfers). one form or another, for a long time. Currently 12 The estate and income tax are deemed to be indirect. nations have a wealth tax in some form. The estate tax is deemed “indirect” by judicial opinion Fieldpoint Private 2 Country Summary6 Algeria Up to 1.5% on worldwide assets Argentina 0.025% over $11,050,000 Bangladesh Progressive to 30% over $2.4M Dominican Republic 1% on all individuals “conducting business” France It was 1.5% on worldwide assets over 10m Euros – after 2018 now only on real estate over 1.3M Euros Italy 0.2% on financial assets held abroad Netherlands 1.6% on assets over 975,000 Euros Norway 0.85% over $200,000 Saudi Arabia 2.5% on the net worth of all businesses in the country Spain On worldwide net assets if they are over 1M euros, then progressive rate up to 2.5% on as- sets over $11M Euros Switzerland Levied by Cantons up to .94% on worldwide assets Uruguay Up to .08% on assets over $127,650

Having said that, the global trend is definitely running CAN I PREPARE? SHOULD I PREPARE? in the opposite direction. Within recent years, Austria, It’s hard to come up with realistic ways to prepare for Columbia, Denmark, Finland, France, Germany, a wealth tax. The most obvious would be to leave the Iceland, India, Ireland, Spain and Sweden have all U.S. and become a citizen of a country that has more abandoned, or greatly reduced their wealth taxes. taxpayer-friendly laws. Even if that were an attractive They have done so because they found them to: option for you (and I’m told the weather is delightful in Costa Rica), Uncle Sam is a step ahead on this one. 1) Promote capital flight and discourage investment; In 2008, Congress created a “mark-to-market” exit tax 2) Require high and difficult levels of administration regime, which generally imposes a tax on expatriates by while yielding relatively low returns; and providing that all of their property is treated as sold on the day before the expatriation date, at its fair market 3) Have a disproportionate effect on seniors. value (FMV). Any gain from the deemed sale is taxable income at capital gains rates to the extent it exceeds For example, in France a wealth tax was imposed on an inflation-indexed threshold income amount; this was assets over 10 million euros and led to an exodus of $713,000 for 2018. (At a 23.8% rate that would equal taxpayers from the country. In 2016 alone, 12,000 almost 12 years of a 2% annual wealth tax and be paid left France, the highest outflow in the upfront.) world. The year before, 10,000 millionaires left.6 As a bon voyage, France also maintained an exit tax of 30% Having said that, we don’t think it matters too terribly on capital gains for 15 years.7 In 2018 the Macron much. Given the many hurdles to it ever becoming government narrowed the tax dramatically, to apply the law of the land (including the possible need for a only to real estate,8 and then reduced the exit tax to two constitutional amendment), we handicap this as no years.9 more than an attention-getting campaign promise. But then again, it has recently begun to garner quite I’m told the weather is a bit of attention and there, of course, were a lot of things we never expected to see come out of the 2016 delightful in Costa Rica. presidential campaign!

Wasn’t it once unthinkable that the host of The Apprentice would be the leader of the free world?

6. Investor’s Business Daily, 2/1/19 7. Taxation International News, 9/17/18 8. Daily Mail, 9/29/17 9. Ibid. 8 Fieldpoint Private 3 COMPLIANCE DISCLOSURE

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