Donald Trump’s Wealth Tax Proposal

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, November 28, 1999

Copyright 1999 Robert L. Sommers, all rights reserved.

Donald Trump’s Wealth Tax Proposal

Billionaire Donald Trump, a prospective Reform Party candidate, has dropped a political bomb on his fellow tycoons: He plans to tax their accumulated wealth and pay off the National Debt in a single year!

Trump has called for a one-time 14.25 percent tax on the net worth of individuals and trusts worth $10 million or more. Trump says this would generate $5.7 trillion in new taxes which would then be used to eliminate the National Debt. The savings in annual interest payments, which Trump estimates at $200 billion, would be used to ensure the solvency of the Social Security system.

Trump’s proposal is intriguing he would also eliminate estate taxes for everyone. Currently, estates greater than $650,000 are subject to estate tax, based on a person’s wealth at death. In other words, the super-wealthy would trade an up-front tax of 14.25 percent for elimination of the 55% estate tax. Trump, who puts his net worth at approximately $5 billion, would pay about $712 million under his plan.

Trump is tapping into the populist notion that the wealthy are disproportionately benefiting from our booming economy while most others are sidelined. In fact, recent reports state the wealthiest 20% of Americans now control 84% of the wealth. Put another way, the wealth of the bottom 80% has dwindled to 16%.

Efforts to circumvent Trump’s tax can be prevented by disregarding any transaction or transfer that would lower the tax. Also, stiff penalties could be assessed against taxpayers and their advisors who improperly attempt to defeat the tax. IRS and courts are familiar with handling valuation issues, because the tax is similar to the present estate tax.

If the National Debt were eliminated, those who paid the tax would also benefit the most from the resulting long-term health of our economy. Not only would the super-wealthy make back the taxes paid, they, along with the rest of the population, would never pay estate taxes again.

There are two major problems with Trump’s plan. First, it is doubtful that the super-wealthy control $40 trillion of assets ($40 trillion x 14.25% tax = $5.7 trillion). The latest Forbes report on the richest 400 Americans places their entire wealth at approximately $1 trillion. A rough guess as to the combined wealth of those affected by the tax might approach $6 trillion, so Trump’s tax, at best, would generate about $1 trillion in taxes, hardly enough to wipe out the National Debt.

More importantly, assuming Trump’s numbers are correct, those affected would have to unload $5.7 trillion of assets and that could roil the stock and real estate markets. Many super-wealthy taxpayers hold assets in their own company and unloading large blocks of stock could cause the price to plummet.

For example, according to Forbes Magazine, Bill Gates, Paul Allen and Steve Ballmar, all heavily invested in MicroSoft, have a combined net worth of $148 billion. Assuming all their holdings were in MicroSoft, they would be forced to unload stock worth $21 billion under Trump’s plan. If MicroSoft stock plummeted, more stock would have to be sold to pay the tax, and so on. In short, it is doubtful our economy could handle such a sudden and massive sell-off of assets without serious repercussions.

Finally, the biggest obstacle to this and every other radical tax plan -- whether it is the flat tax or national sales tax -- is the general mistrust of government. Remember the Tax Reform Act of 1986 – the "mother of all tax reforms" – in which income tax rates were reduced and the capital gains deduction was eliminated? Congress failed to honor that tax reform legislation and has changed the law almost every year since enactment.

Who knows whether Trump’s one-time wealth tax would never be repeated? Who has confidence that a future Congress would not reactivate the estate tax?

In conclusion, paying off the National Debt by soaking the super-rich sounds appealing, but like other radical tax proposals, it should be considered another political ploy aimed at voters’ emotions, rather than a solid tax proposal grounded in economic reality.




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