Leon Cooperman: a wealth tax will not solve US inequality
There has been much written lately about imposing an explicit wealth tax, as well as higher income taxes, on the richest Americans.
Several Democratic presidential contenders, most notably Elizabeth Warren, have called for a wealth tax and it has been embraced by more than a few members of the very group that would be hit hardest by such a levy.
Proponents such as George Soros, Chris Hughes and Abigail Disney argue that such a tax could raise trillions of dollars over a decade, money that might be used to address myriad social challenges such as climate change, crumbling infrastructure, student loan debt relief, structural poverty and universal childcare. They claim in an open letter that a wealth tax is patriotic and would strengthen our democratic freedoms, and that arguments against the tax “are mostly technical and often overstated”.
As a taxpaying American businessman with more than a passing familiarity with the ways of Washington, I disagree. I question whether an explicit wealth tax is the best path forward for the country and whether the federal government is currently up to the task of allocating those tax resources efficiently.
While I have been richly rewarded by a life of hard work combined with good luck, I was not to the manor born. My father was a plumber in the South Bronx after emigrating from Poland. I benefited from a good public education system and my parents’ constant prodding, becoming the first in my family to earn a college degree. When I joined Goldman Sachs, I had no savings, a negative net worth, a student loan, and a six-month-old baby (not to mention his mother, my wife of now 55 years) to support.
After a successful run at Goldman, I started a private investment firm. As a result of my good fortune, I have been able to give away to those less blessed far, far more than I have spent on myself and my family over a lifetime, and I have joined Warren Buffett and Bill Gates in pledging that the majority of my money will continue to do some good after I’m gone. I know many people who are similarly situated, by both humble origin and hard-won accomplishment. We feel privileged to be able to give, and we do. My parents would have expected nothing less.
The history of explicit, annual wealth taxes, as distinct from one-time estate taxes, has not been salutary. IMF executives James Brumby and Michael Keen found that among OECD countries, the number with an active wealth tax dropped from 12 to four between 1985 and 2007. They also warned that such taxes were “of limited effectiveness . . .[and] notoriously prone to lobbying and the granting of exemptions that the wealthiest can exploit”.
Why should we expect a different outcome here? It would be more constructive to eliminate government waste, redirect existing resources to social exigencies and remove biases built into the tax code that frustrate the objective that everyone pay their “fair share”.
Some wealthy business owners largely avoid paying income taxes by taking very little out of their companies in the form of salary or dividends and sitting on massive unrealised gains in their stock that can then be bequeathed to charity with no tax ever being paid. Closing that loophole would help underwrite even some of the most ambitious legislative programmes.
I believe in a progressive income tax structure — the wealthy should pay more. But at some point, the effective tax rate (federal, state and local rates combined) becomes confiscatory. That never has been, and in my view never should be, the American ethos.
Personally, I don’t mind working six months of the year for the government and six months for myself, paying a combined tax rate of 50 per cent on my income (in some US cities that effective rate is even higher), but many of the nation’s highest earners pay far less.
Rather than enact an explicit wealth tax whose efficacy has been debunked worldwide, Congress should revisit the “Buffett rule”, named for his belief that the wealthy should not pay a smaller percentage of their income in taxes than those who are less affluent, and impose a surtax on those making more than $1m. The combined effective tax rate still should not exceed 50 per cent.
But before levying more taxes of any stripe, presidential candidates should commit to trying to fund their agendas by culling bureaucratic waste. Right now, I don’t have much faith that Washington can be relied upon to spend new tax revenues efficiently. Frustrated efforts to privatise the US Postal Service, which lost nearly $4bn in its latest fiscal year, are a good case in point.
I know that cut-the-bloat doesn’t fire up the Democratic political base the way soak-the-rich does, but it would go a long way to closing the looming budgetary gap and make any later proposals to raise taxes a lot more credible and palatable.
The writer is chief executive and chairman of Omega Family Office