Vermont, well known for its liberal politics, has set course for another far-left folly. Leading members of the state legislature have introduced bills that would impose two taxes on the most productive residents of the state.
The first tax would add a 3% surtax on people with adjusted gross incomes of more than $500,000. That is bad policy but not overly controversial. The second proposal would tax on an annual basis assets valued above $10 million. That tax would be imposed on assets whether gains were realized or not.
Vermont is already a high-tax state. It has very low levels of relative poverty and even lower levels of absolute poverty. Over the past year, nine states, including Vermont, have proposed taxing wealth. The stated purpose is to reduce income inequality. In reality, these states want to expand the power of government at the expense of the more productive private sector.
At the state level, wealth taxes are legal. Regardless, such taxes are poor policy. A wealth tax leads to economic inefficiency. Productive assets are taxed. Capital is transferred to the government. Wealth taxes reduce private sector dynamism. Excess bureaucracy drains almost 20% of the economy each year. In the face of a wealth tax, the most productive residents of Vermont would hire expensive tax lawyers to engage in legal tax avoidance. Spending money to avoid taxes destroys capital.
Moreover, taxing assets where there is no clear measure of market value is administratively difficult. Determining value would generate administrative costs. Capital would be destroyed. The wealthy would challenge valuation decisions. Litigation would follow. Again, capital would be destroyed. Taxing unrealized gains from stock market investments would create a negative feedback loop. Wealthy shareholders would be forced to sell stocks to pay their tax bills. Selling stocks to pay tax bills would lower the value of stocks. Apparently, Vermont progressives do not know that 61% of households own equities.
A wealth tax on the value of private companies would discourage the owners of such companies from going public and raising capital for new productive ventures. Investment would be foregone. The consequences of a wealth tax are significant and harmful. It is noteworthy that only 3 of the 12 countries in Europe that have tried wealth taxes maintain that policy. Wealthy Europeans did everything possible to avoid paying the taxes. Anticipated revenues never materialized. It would be the same for Vermont. It is easy for a wealthy person to move to a lower-tax jurisdiction. The wealthy are already fleeing California, Illinois, and New York.
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Two of the stated purposes for the proposed Vermont wealth tax are reducing income inequality and expanding the welfare state. Yet the distribution of income in the United States after transfers and taxes is essentially the same today as it was 40 years ago. And as noted, Vermont has very low levels of poverty. The progressive legislators are trying to solve problems that do not exist.
Rather than focusing on taxes, Vermont legislators should work to reduce energy costs for residents of the state. Progressive policies make heating a home in winter very expensive.
James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note.