Wealth Tax (Incremental Curve Structure)

Core Concept

What: Annual tax on net worth above threshold (e.g., $50 million), using continuous progressive curve rather than traditional tax brackets.

Why Incremental Curve vs. Traditional Brackets

The Problem with Traditional Brackets

Traditional bracket systems create cliffs where tax rates jump suddenly. This creates three major problems:

• Gaming opportunities: People structure assets to stay just below bracket thresholds
• Artificial ceilings: Sudden jumps discourage pushing past certain wealth levels
• Discourages competition: "Why build to $1.1B if the tax jump at $1B makes it not worthwhile?"

How Incremental Curve Solves This

An incremental curve structure eliminates these problems:

• No gaming opportunities: No thresholds to structure assets around
• Preserves competition: Every dollar of wealth growth faces marginally higher tax, but increase is smooth and proportional—not prohibitive
• Maintains innovation incentive: Billionaires continue competing to build larger companies because growth remains worthwhile
• Economically rational: Reflects actual diminishing marginal utility of wealth
• Harder to evade: Continuous function eliminates strategic positioning at bracket boundaries

Example curve concept: Rate starts at 0% below threshold, then increases smoothly—perhaps 1% at $100M, 2% at $500M, 2.5% at $1B, 3.5% at $10B, approaching but not exceeding a ceiling around 4-5% at extreme wealth levels.

Tax Rate Examples

Curve Formula Options

Economists and mathematicians determine optimal curve formula. Three main approaches:

1. Logarithmic Function

2. Polynomial Function

3. Piecewise Smooth Function

Recommended: Piecewise smooth function provides most flexibility while maintaining gaming-resistance. Tax policy experts calibrate specific parameters based on revenue targets and economic modeling.

What Gets Taxed

Comprehensive Net Worth Definition

All assets included:

• Financial assets: Stocks, bonds, mutual funds, cash, certificates of deposit
• Real estate: Primary residence, investment properties, land holdings (at market value)
• Business interests: Private company equity, partnership shares (fair market value)
• Tangible assets: Art, jewelry, collectibles, vehicles, yachts, aircraft (above de minimis amounts)
• Trusts and foundations: Assets in trusts where taxpayer is beneficiary
• Foreign assets: All assets regardless of location (US citizens/residents taxed on worldwide wealth)
• Retirement accounts: 401(k)s, IRAs, pension values

Liabilities subtracted:

• Mortgages and secured debts
• Business loans (legitimate operating debt)
• Other documented liabilities

Net worth = Total Assets - Total Liabilities

Valuation Methodologies

Publicly traded assets:

• Market value as of December 31 (or fiscal year end)
• Straightforward and objective

Private business interests:

• Independent appraisal required for holdings >$10M
• Methods: comparable company analysis, discounted cash flow, industry multiples
• IRS can challenge undervaluations
• Penalties for intentional misvaluation

Real estate:

• Property tax assessed value or independent appraisal
• Higher of two values used to prevent gaming through low assessments

Art and collectibles:

• Independent appraisal every 3 years for items >$100k
• Auction results and comparable sales used for valuation

Trusts and complex structures:

• Look-through approach: value underlying assets
• Grantor trusts attributed to grantor
• Cannot hide wealth in shell structures

Gaming Prevention

1. The "Asset Hiding" Problem

Problem: Move assets offshore or into complex structures to avoid detection.

Solutions:

• FATCA expansion: Foreign financial institutions must report US taxpayer accounts or face withholding
• Beneficial ownership registries: Shell companies must disclose true owners
• Look-through rules: Trusts, foundations, and entities cannot shield wealth from taxation
• Exit tax: Those renouncing citizenship pay exit tax on unrealized gains (prevents expatriation to avoid wealth tax)
• Whistleblower bounties: Rewards for exposing hidden wealth (up to 30% of recovered taxes)

2. The "Undervaluation" Problem

Problem: Claim assets worth less than true value to reduce tax.

Solutions:

• Independent appraisals: Required for private assets >$10M
• IRS valuation challenges: IRS can commission own appraisals and impose penalties if taxpayer valuation off by >20%
• Subsequent sale disclosure: If asset sold within 3 years of valuation, sale price becomes presumptive valuation for prior years
• Professional liability: Appraisers face penalties for knowingly undervaluing

3. The "Debt Loading" Problem

Problem: Take on artificial debt to reduce net worth on paper while retaining asset control.

Solutions:

• Economic substance test: Debt must serve legitimate business purpose beyond tax avoidance
• Related party loans: Loans from controlled entities don't reduce net worth for wealth tax purposes
• Interest payment verification: Taxpayer must show actual interest paid; if not, loan doesn't count as liability
• Debt-to-asset ratio limits: Excessive leverage (>80% of asset value) triggers scrutiny

4. The "Asset Stripping" Problem

Problem: Transfer wealth to family members to stay below threshold.

Solutions:

• Gift and estate tax coordination: Transfers subject to gift tax; can't avoid wealth tax through gifting
• Lookback period: Transfers within 5 years before wealth tax takes effect are added back to donor's wealth
• Generation-skipping provisions: Trusts for grandchildren or later generations still attributed to grantor
• Family attribution rules: Wealth of minor children attributed to parents

5. The "Expatriation" Problem

Problem: Renounce citizenship and move abroad to avoid wealth tax.

Solutions:

• Exit tax on unrealized gains: Mark-to-market taxation on all assets upon expatriation
• 10-year tail provision: US-source income remains taxable for 10 years post-expatriation
• Covered expatriate status: High net worth individuals face additional restrictions and reporting
• International coordination: Work with other countries on wealth tax treaties to prevent tax haven flight

International Coordination

Why Coordination Matters

Wealth is mobile. Without international cooperation, wealthy individuals can relocate to tax havens. Coordination prevents race to the bottom.

Coordination Mechanisms

OECD/G20 Framework:

• Minimum wealth tax standards among developed nations
• Automatic information exchange on asset holdings
• Coordinated enforcement against tax havens
• Similar to corporate minimum tax coordination

Unilateral Measures (if coordination fails):

• US has sufficient market power to enforce unilaterally
• Exit taxes prevent simple expatriation
• Withholding on US-source income for non-compliant jurisdictions
• Deny market access to those evading wealth tax

Precedent: FATCA (Foreign Account Tax Compliance Act) successfully forced global banks to report US taxpayer accounts. Similar approach works for wealth tax.

Enforcement Architecture

IRS Capacity Building

• Specialized wealth tax division: Dedicated unit with expertise in high-net-worth taxpayers
• Valuation specialists: Hire appraisers, forensic accountants, art experts
• International coordination team: Work with foreign tax authorities on information sharing
• Technology investment: AI and data analytics to identify evasion patterns
• Adequate funding: Every $1 spent on enforcement returns $5-10 in recovered revenue

Audit Strategy

• 100% audit rate for taxpayers with net worth >$1B (small population, high stakes)
• 50% audit rate for $500M - $1B
• 25% audit rate for $100M - $500M
• 10% audit rate for $50M - $100M
• Risk-based selection for audits (anomalies, red flags, prior non-compliance)

Penalties for Evasion

• Negligence: 20% penalty on underpayment + interest
• Substantial understatement: 40% penalty if understatement >25% of true tax
• Fraud: 75% civil penalty + potential criminal prosecution
• Failure to file: 5% per month up to 25% of tax owed
• Foreign asset non-disclosure: 40% penalty on value of undisclosed foreign assets

Taxpayer Protections

• Right to independent appraisal of disputed valuations
• Appeals process through Tax Court
• Innocent spouse relief for joint filers
• Installment payment plans for liquidity-constrained taxpayers
• Deferral options for illiquid assets (e.g., closely-held business)

Liquidity Provisions

The Illiquidity Challenge

Some taxpayers have high net worth but low liquid assets (e.g., founder with company stock, farmer with land). Need mechanisms to avoid forced asset sales.

Solutions

Deferral Options:

• Pay wealth tax from business cash flow over time (up to 5 years)
• Interest charged at federal rate
• Security interest in illiquid assets ensures payment

Stock Transfer to IRS:

• Pay wealth tax in company stock rather than cash
• IRS sells shares gradually to avoid market disruption
• Preserves founder control while satisfying tax obligation

Exemptions and Phase-Ins:

• Primary residence value excluded (up to reasonable limit, e.g., $10M)
• Working farms: special valuation rules based on agricultural use value
• First-year exemption for newly public companies (IPO grace period)

Constitutional Considerations

Legal Basis

Wealth tax constitutionality debated but defensible:

Supporting Arguments:

• 16th Amendment: Congress has power to tax "incomes, from whatever source derived"—can include unrealized appreciation
• Mark-to-market taxation: Precedent exists for taxing unrealized gains (dealers, traders)
• Not a "direct tax": Tax on property, not on existence—similar to property taxes universally upheld
• Narrow application: Applies only to extreme wealth, not broad-based direct tax requiring apportionment

If challenged:

• Narrow wealth tax to specific asset types more clearly constitutional
• Structure as mark-to-market regime rather than "wealth tax" label
• Legislative findings showing revenue necessity and inability to achieve through other means
• Constitutional amendment if necessary (politically difficult but possible with broad support)

Revenue Projections

Target Revenue: $300-500 Billion Annually

Tax base estimates:

• ~75,000 households with net worth >$50M
• Combined net worth: ~$15-20 trillion
• Effective average tax rate: 2-2.5%
• Revenue: $300-500 billion

Sensitivity to assumptions:

• Evasion/avoidance reduces revenue 10-20%
• Valuation discounts for illiquid assets reduce revenue 5-10%
• Economic growth increases wealth base, offsetting losses

Conservative estimate: $300B. Optimistic: $500B. Likely: $400B annually.

Revenue Allocation

• Medicare for All: $150-200B (primary use)
• Infrastructure: $75-100B (roads, bridges, broadband, clean energy)
• Climate investment: $50-75B (renewable energy, carbon capture, adaptation)
• Education: $25-75B (universal pre-K, college affordability, student debt relief)

Implementation Timeline

Year 1: Passage and Preparation

• Q1: Introduce legislation, conduct hearings, build coalition
• Q2: Pass wealth tax act through Congress
• Q3-Q4: IRS rulemaking, hire staff, build systems
• Outreach: Educate taxpayers, provide guidance on valuation and compliance

Year 2: First Filing and Collection

• Q1: Taxpayers file first wealth tax returns (based on Year 1 net worth)
• Q2-Q4: IRS processes returns, begins audits of largest taxpayers
• Revenue begins flowing: Initial $200-300B (ramp-up year)

Year 3+: Full Implementation

• Annual filing and collection established
• Enforcement mechanisms refined based on Year 2 experience
• Full $300-500B annual revenue achieved
• International coordination strengthened

Economic Impact

On Wealth Holders

• Wealth continues growing: Even at 4% tax, 8% returns = 4% annual growth
• Minor behavior changes: Some shift to higher-returning investments
• Philanthropy incentivized: Charitable giving reduces taxable wealth
• No mass exodus: US market access and rule of law outweigh tax considerations for most

On Economy Overall

• Increased demand: Revenue funds services that create jobs and boost consumption
• Reduced inequality: Measurable decrease in wealth concentration over time
• Investment shift: Some capital moves from speculation to productive investment
• Innovation continues: Smooth curve preserves incentives for building large companies

On Government Finances

• Sustainable funding: $300-500B annually for critical programs
• Deficit reduction: Portion of revenue can reduce national debt
• Fiscal stability: Revenue grows with wealth accumulation (counter-cyclical to some extent)

Why This Works

• Addresses inequality at source: Taxes accumulated wealth, not just income
• Preserves innovation: Smooth curve eliminates artificial ceilings
• Hard to evade: Comprehensive asset coverage, international coordination, strong enforcement
• Politically popular: 70%+ support taxing extreme wealth
• Economically sound: Doesn't impede growth, provides sustainable revenue
• Proven model: Variations exist in Switzerland, Spain, Norway—just need stronger enforcement

Implementation Details

Tax policy experts, economists, and mathematicians determine:

• Optimal curve formula (logarithmic, polynomial, or piecewise smooth)
• Specific rate parameters to hit revenue targets
• Valuation methodologies for different asset classes
• Audit procedures and risk-based selection criteria
• International coordination mechanisms and treaties
• Liquidity provisions and payment deferral rules
• Technology systems for compliance and enforcement
• Legal strategies for defending constitutionality

The framework provides direction: progressive incremental curve on net worth above $50M generating $300-500B annually. Specialists determine optimal implementation.