Tax Notes Quotes Beth Kaufman on Wealth Tax

Top Democratic presidential candidates say they want a robust wealth tax with hard-line rules to prevent the wealthy from getting too clever with their tax planning. Wealth planners say they couldn’t be more excited.

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“If they take a hard line, it’s going to be harder to avoid. If you create asset class preferences, people will respond to those preferences,” said Beth Shapiro Kaufman of Caplin & Drysdale. If a wealth tax carved out art, farms, or family-owned businesses from the tax, that would “cause the wealth to gravitate to those investments,” she explained.

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The wealth tax regimes employed by European countries over the past few decades were riddled with exemptions, and a big reason why many of those countries have repealed their wealth taxes is that it became too easy to avoid the tax, Kaufman said.

Closer to home, for example, Florida had a tax on intangible assets like stocks and bonds for many years that it eventually repealed in 2007 because it had gotten to the point where paying the tax almost became optional because there were so many well-known ways to avoid it, Kaufman said.

“When a tax becomes optional, then you can pretty much guarantee it’s going to go away, because it just becomes unfair, or everybody avoids it and you’re not collecting much revenue,” she explained.

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Kaufman, who spent six years in Treasury’s Office of Tax Policy working on trust and estate matters, wasn’t impressed by Warren’s vision for modernized valuation methods as the ultimate solution. “That sounds like a pretty fanciful vision that she has there,” Kaufman said.

Valuation issues are already “one of the big bugaboos” affecting the estate tax, and many of those same issues would carry over to a wealth tax, despite the best efforts of lawmakers to try to mitigate them, Kaufman predicted. And unlike the estate tax, which is a one-time event, a wealth tax would be imposed annually, multiplying the administrative challenge considerably for the IRS.

Still, a formula-based approach to valuations would be more administrable and isn’t totally unprecedented, according to Kaufman. She noted that there are already “rules of thumb” for valuations of assets like oil and gas interests, which she said are usually valued at three to five times their annual return.

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Kaufman reported that her clients seem to view a wealth tax as politically infeasible, with little likelihood of actually taking effect. None of them have begun packing their belongings to expatriate just yet, though they may just be waiting to see the results of the Democratic primary, she joked.

Both Sanders’s and Warren’s proposals call for a 40 percent exit tax on the assets of wealthy taxpayers to try to discourage the wealthy from expatriating, but expatriation even now is already a “serious endeavor” subject to an exit tax, Kaufman noted.

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Kaufman likewise said that proactive planning for a wealth tax would be premature, but that clients could divide family wealth assets among as many people as possible to multiply the number of thresholds at which such a tax would kick in. That advice stands true even if a wealth tax doesn’t materialize, she continued, because then clients can simultaneously take advantage of the much higher estate and gift tax exemptions currently in effect before they expire and decline precipitously in 2026 or potentially even earlier.

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