David Leonhardt: A man with a plan for inequality

Let the rich be taxed the way everyone else is. View in [Browser]( | Add nytdirect@nytimes.com to your address book. [The New York Times]( [The New York Times]( Wednesday, April 3, 2019 [NYTimes.com/David-Leonhardt »]( [Op-Ed Columnist] Op-Ed Columnist The average wealth of the poorer half of American households has dropped below zero in the years since the financial crisis, according to [the World Inequality Database](. What does that mean? It means that fully half of Americans hold more combined debt than assets. The average wealth of the richest 1 percent of households, meanwhile, has more than recovered its losses from the crisis. They’re now richer than ever. This situation isn’t healthy. And the most obvious solution is to change the tax code — specifically, to increase taxes on wealth to undo some of the radical increases in inequality over the last few decades. Fortunately, some policymakers are starting to come forward with proposals to address the wealth imbalance. The latest is [Ron Wyden]( the Democratic senator from Oregon. He joins a few presidential candidates — [Kamala Harris]( [Bernie Sanders]( and [Elizabeth Warren]( — who have also proposed higher taxes on wealth. Goodbye, special treatment The Wyden plan “would transform how the U.S. taxes the wealthiest people,” The Wall Street Journal’s [Gabriel Rubin and Richard Rubin]( write. Under current law, investors pay taxes on the increased value of the stocks and bonds they own — known as capital gains — only when they sell them. They also pay a lower tax rate than that on most forms of income. Wyden’s plan would remove both of those advantages. Investors would have to pay the ordinary income-tax rate on their capital gains. And they would have to do so each year, based on the assets’ value at the time. In accounting terms, this practice of updating the value of an asset is known as “mark to market.” The “mark-to-market” idea is similar in principle to the reassessment of home values for property-tax calculations. [As I’ve noted before]( the property tax is an annual tax on the largest asset for most middle-class families. But the very rich don’t face an annual tax on their largest holdings. Their largest holdings often include stocks. Which means that the lower tax rate on capital gains, combined with the deferral of taxing them, has enormous financial consequences, as [Steve Wamhoff]( of the Institute on Taxation and Economic Policy, explains on JustTaxes.org. “Wealthy households, who already own the most in assets, can defer paying tax and grow their wealth much more rapidly, while income most of us earn from work is taxed annually,” Wamhoff writes. “This is a massive tax break for the wealthy, and mark-to-market taxation would bring it to an end.” [Lily Batchelder]( and [David Kamin]( both N.Y.U. professors and former Obama administration officials, noted that the Wyden plan would also raise significant amounts of revenue for the federal government. That money could be used to reduce the deficit or pay for programs such as preschool or middle-class tax cuts. Critics of the Wyden idea (as you can see [here]( claim that revaluing assets each year is too complicated to be feasible and that the plan will harm economic growth. I don’t buy either claim. On the economic effects: It’s not as if the American economy has been performing well in recent years. As wealth inequality has risen, economic growth has repeatedly [missed forecasters’ expectations](. On the complexity: All taxes have some complexity. But it’s certainly feasible for the government to become more aggressive about taxing top incomes and wealth. I don’t know whether the Wyden plan will ultimately make more sense than Warren’s more sweeping proposal [to tax large fortunes]( each year or the proposals from [Harris]( and [Sanders]( to increase the inheritance tax. But this is the right time for the debate. The next time the country has a president who’s worried about inequality and middle-class living standards, it will be time to increase taxes on extreme wealth. 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