Problems with the Warren tax plan

See Yang vs. Warren: Who Has the Better Tax Plan? by Greg Mankiw. Excerpts:

"Senator Warren has proposed a new tax on millionaires and billionaires. Every year, households would be taxed 2 percent on wealth exceeding $50 million or 3 percent on wealth exceeding $1 billion. The revenue, Senator Warren has said, would fund programs such as universal child care and tuition for public higher education."

"less than 0.1 percent of families would pay this tax.

Determining how much those families would owe, however, would be devilishly difficult. One problem is that many kinds of wealth have no market valuation.

Take Rihanna. She is fabulously wealthy, but to put a number on her wealth, the I.R.S. would have to also estimate the present value of her songs and their possible future royalties. Sometimes, such intangible assets are sold on markets — Michael Jackson once bought the rights to Beatles songs — but often there is no market price for them.

How popular will her songs be decades from now, and how much money will they bring in? Any estimate would be an educated guess, at best, yet it would have to be made.

A similar situation arises for many family businesses. When businesses are sold, accountants often attribute significant value to an intangible asset called good will. To assess a wealth tax, the I.R.S. would have to estimate the good will of every family business that hasn’t been sold.

Good will is hard to measure: It includes things like a business’s brand name, reputation, technology and its network of customers and contacts. Simple formulas that the I.R.S. might use to calculate this could result in substantial inequities and perhaps litigation.

More important, Senator Warren’s tax would likely raise less revenue than its proponents believe, as rich people would take actions to avoid it.

For example, the Warren tax may provide an incentive for high-wealth couples to divorce. Whereas a married couple could exempt $50 million of wealth from the tax, two unmarried partners could each exempt $50 million for a total of $100 million. Given the 2 percent tax rate, married couples could avoid $1 million per year in taxes by divorcing.

Giving money to adult children would also reduce a family’s tax liability. A married couple with three adult children could, by divorcing and gift-giving, exempt $250 million from the Warren tax.

In addition, rich folk planning to bequeath much of their wealth to charity would have an incentive to accelerate that giving during their lives, shrinking the wealth base subject to the Warren tax."