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| Opportunities & Exposures: Policy |
Securing Our Wealth
Gregg S. Robins
09/01/2004
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The election season usually brings siren calls for taxes on the rich and threats
directed at moneyed special interests. This year is no different. Predictably,
President Bush’s opponents have tagged his administration’s tax cuts as
giveaways to the affluent, and fiscally disastrous. But even the shrillest
naysayers seem to be ignoring a conflict in the Bush tax plan that will
ultimately sabotage even the wealthy. The problem is that while taxes on a
growing wealth base are decreasing or disappearing entirely, federal spending is
increasing, paced by national security expenditures. In fact, more than 75
percent of our budget increases are funding security, which is essential for
wealth generation and preservation. With our record deficits, how are we going
to finance this crucial spending? I have a not-so-modest proposal.
The United
States has derived immense benefits from wealth creation. Indeed, the country’s
wealth base helped cushion the recent recession, providing strong liquidity
through a robust housing market. But the 9/11 attacks showed that terrorism is
potentially lethal to our wealth base. The country lost a staggering $5 trillion
in wealth in the 2000-2002 market decline, which was exacerbated by the
terrorist attacks. Fortunately, the subsequent economic rebound, buttressed by
improved security, created more than $4 trillion. In fact, wealth has recovered
much more quickly than jobs and wages. Wages and salaries have fallen since 2001
from almost 56 percent of national income to about 51 percent.
While no one
doubts that all Americans benefit from increased security, the manner in which
our country protects businesses and financial markets offers disproportionate
benefits to those with greater assets.
New York City Mayor Michael Bloomberg
has argued that because New York faces a particularly high exposure to terrorist
attacks, the city should receive requisite levels of resources. In much the same
way, our national security should receive funding from the wealth base it
protects.
On the back of the information and technology revolutions, American
household wealth between 1980 and 2000 increased from $8.2 trillion to $37
trillion, with the number of U.S. millionaires rising from 200,000 to more than
5 million. Despite the drop during the recent recession, U.S. wealth is now at a
record level of more than $44 trillion. At the same time, wealth inequality has
risen to dramatically high levels. The top 10 percent of the population now owns
approximately two-thirds of the country’s total wealth; the top 1 percent owns
about 50 percent of its financial assets.
Decreases in taxes on wealth began
under President Clinton, but under President Bush, wealth taxes across the
board, from capital gains to dividend taxes, are declining or disappearing over
time. As a result, income from labor is now taxed at a much higher rate
than income from assets. The Bush plan lowers the federal estate tax—and
proposes eliminating it permanently as of 2011—right in the middle of the
largest intergenerational wealth transfer in our history. This also benefits
primarily the top 1 percent. Reforming rather than repealing the estate tax
could raise hundreds of billions of dollars over the next decade.
We could
also follow the lead of a handful of states—Florida, for example—and impose a
so-called wealth tax on financial and real estate assets. This tax would have a
minimum deductible ($100,000, for example) and increase with asset levels; in
other words, it would be progressive, never reaching more than 0.5 percent of
total wealth on the highest level. Many Western European countries—Germany,
Spain and Sweden among them—have similar taxes on their wealth base. NYU
Professor Edward Wolff estimates that a wealth tax in the United States modeled
on the Swiss system could generate 0.8 percent of total national income. If we
had had such a tax last year, it would have raised $73 billion, or double the
annual budget of the Department of Homeland Security.
Call it wealth tax,
security tax or responsibility tax, it ought to be a central issue in the
presidential race. It is neither appropriate nor just to pass the bill for
national security to the next generation; it will likely face profound resource
constraints of its own. Many will protest, but affluent Americans should, for
both the nation’s good and for self-interest, support the critical security
platform that allows their wealth to flourish.
 | Gregg S. Robins is a managing director of the consulting and financial advisory
firm Netburn McGill and an executive fellow at the NYU Stern School of
Business. |
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