Soak the ‘filthy rich’ by taxing their consumption, not their wealth

Many rich Americans aren’t just rich; they’re filthy rich. They made their money the old fashion way: They inherited it.

They fly their private jets, cruise their massive yachts, drive their luxury cars, visit their mega mansions, dine at Michelin three-star restaurants, swig $21,000 bottles of Chateau Petrus, parade their hyper-fancy clothes at their hyper-fancy clubs and work full-time on their golf games. They view themselves as royalty. 

{mosads}The rest of us? We’re rabble. Still, the filthy rich don’t lack for love. They love themselves deeply, as do their well-paid sycophants. Best of all, they pay zero taxes. How? By not selling assets with capital gains and borrowing against those assets to pay their bills.

When they die, they leave their wealth to their kids with a step-up in basis that wipes out the capital gains taxes that would otherwise be due.  

But many of the filthy rich aren’t content with a life of pure indolence and indulgence. They know that mass-adoration beats self-adoration. So they enter politics and get all the votes their money can buy. After all, who is more entitled to run the country, even if it means running it into the ground? 

However, many other rich Americans aren’t just rich; they are responsibly rich. They made their money the new fashioned way: They worked for it. But they know that luck, not sweat, graced their paths. Their focus is on giving back, not taking more.

They pay their taxes, found real charities, endow universities, support hospitals, fund medical research and gamble on products that can help us all. Their lives are lives of conspicuous philanthropy, not conspicuous consumption.  

This is why taxing wealth — the Democrats’ tax du jour with its star endorser, economist Thomas Piketty, is not the answer. It lumps the filthy rich and responsible rich into the same boat, and it tells everyone with money to use it or lose it. In other words, it encourages consumption.

For our country, which is saving and investing next to nothing, jacking up consumption is the last thing we want. What we want is for everyone — rich, middle class and poor — to grow and invest their wealth, not spend their wealth. 

Yet, sticking with our current tax system is a non-starter. Inequality is terrible and growing. The filthy rich, starting with his majesty, the president, must pay their fair share of taxes. But the main reason we need real tax reform is not the tax dodgers. The main reason is our government is bankrupt — not in 30 years, not in 10 years; it’s bankrupt today.  

I’m not just referencing our $20 trillion in official debt, which is now, thanks to our supposed Republican fiscal “conservatives,” growing at close to $1 trillion a year. I’m referencing all the debt that successive Congresses, blue and red, have carefully kept off the books, year after year.

This debt includes Social Security’s $34 trillion unfunded liability. When you add up and present value all the government’s projected expenditures and net out all its projected receipts, using the latest long-term Congressional Budget Office projections, the difference — the 2019 U.S. fiscal gap — is $239 trillion! This is the extra money we need in reserve as of today to cover all the future outlays our tax system won’t support.  

The bottom line? We need a lot more revenue, especially from the filthy, irresponsible rich. The method is easy. Tax the consumption of the rich, not their wealth. But how? This too is easy. We establish a progressive consumption tax, which taxes consumption in excess of $100,000 at rates that rise from zero to 30 percent.

To make sure the Trumps of this world can’t avoid this tax, we tax consumption on a cash-flow basis. Consumption equals income minus saving. Income is all money flowing into the households (from wages, interest earnings, asset sales, dividends, etc.), and saving is all money flowing out of the household that’s spent on the purchase of assets, i.e., spent on investment. 

Income-in less investment-out equals consumption, which can be taxed on a progressive basis. Tracking the net consumption cash flow of the rich is far easier today than in the past given electronic financial records and our government’s decision to force Swiss and other banks to disclose the wealth that rich Americans hold abroad. 

When I ran for president in 2016 as a registered write-in candidate, I included a progressive cash-flow consumption tax as part of my proposed tax reform.

I also added a carbon tax ($80 per cubic ton of CO2), a 20 percent value-added tax, and an inheritance tax (20 percent on inheritances above $5 million) a  took the lid off the Federal Insurance Contributions Act payroll tax, started the payroll tax at $40,000 and eliminated both the personal income and corporate income taxes. 

As you can read in my platform, which every candidate for president, including Trump, should do, my tax reform as well as reforms of our spending policies are designed to soak the filthy rich, but not the responsible rich.

Indeed, the working rich, like everyone else in the economy, would face, at the margin, a 30-percent tax on money earned from working.  

The platform’s tax plan is dead simple. So are its proposed reforms to fix health care, Social Security and Wall Street. Collectively, they would eliminate our fiscal gap. 

These are not the plans of an ideologue. These are the plans of a politically non-aligned professional economist,who consulted carefully about the plans with the nation’s top non-aligned professional economists.

{mossecondads}Yes, there is even a plan for “Medicare for all,” indeed one that Sen. Sanders’s (I-Vt.) proposed legislation appears to allow. It’s “Medicare Part C (the Advantage Plan) for all.” We need health care for all, but at an affordable price and operating with intense private competition, without cherry-picking and within a strict federal budget. 

Unless we get everyone insured in the right way at the right price, no tax on the rich, even a 100-percent tax on their wealth, will save the day. That’s why “Medicare Part C for all” is the only way to go 

So to all the Democratic candidates for president, do yourselves a favor: Steal my platform! Also, think about what you’re saying about the rich. Painting great philanthropists like George Soros, Warren Buffett and Bill Gates with the same brush as Donald Trump isn’t fair. It will also lead to more of the misguided economic policy in which our country appears to specialize. 

Laurence Kotlikoff is a William Warren Fairfield professor at Boston University (BU) and professor of economics at BU. He is also a fellow of the American Academy of Arts and Sciences, a research associate of the National Bureau of Economic Research, a fellow of the Econometric Society and was formerly on President Ronald Reagan’s Council of Economic Advisers. Follow him on Twitter: @Kotlikoff.