David R. Henderson  

Think on the Margin

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Donald Trump's potential candidacy for President reminds me of a proposal he made in 1999 and Bruce Bartlett's analysis of his proposal in the Wall Street Journal. Trump had proposed a one-time 14.25% net-worth tax on those with a net worth of $10 million or more.

Here's a question I asked about Bartlett's column in a problem set I gave my students:

Midway through the column, the author states, "that means that anyone with assets between $10 million and $11.425 million would have an enormous incentive to give away $1.425 million." Is he correct? Explain why or why not. [HINT: think carefully on the margin.]


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CATEGORIES: Taxation



COMMENTS (13 to date)
LE writes:

He is incorrect. Anyone in that range has an incentive to reduce their net worth to $0.01 below $10 million so as to avoid the tax. The amount that they will want to give away varies depending on their net worth.

James writes:

Someone with $11,661,807.58 loses the same amount of money if they take the tax or give just enough away so that they aren't taxed. Someone with more should take the tax, and someone with between $10,000,000 and that number should give enough away to avoid the tax. That is, as long as these people think the government will use their money just as well as they could, in which case they would benefit a lot from researching how cost-efficient the most efficient charities are.

John writes:

LE is right. Plus, the person with the greatest incentive to give money away is actually the person with $10m exactly, who has a truly enormous incentive to give away one cent. The person with $11.425m could give away $1.425m, but he probably doesn't really care (since one way or another, he'll end up with just about $10m).

Jeff H. writes:

Anyone whose assets totaled between 10 million and ~11.7 million would lose less wealth by voluntarily reducing their assets to 999,999.99 than by paying the tax.

john42 writes:

This seems a pointless question. The IRS always does a ramp or phase-in with taxes such as these. If it were to be implemented, the tax would start at 0% at $10M, ramping up to 14.25% at $11.662M or higher. That way no one would end up with less than $10M as a result of paying the tax.

J Storrs Hall writes:

James is right -- $11661807.58 is the number, not $11.425 million. Why can't we hold our reporters to the standard of being able to do high-school algebra?

As to the question of indifference to giving away or being taxed, I, and most people I know, would bear a significant extra burden to avoid the tax (or anything else resembling theft).

But the story was talking about net worth, not income; why not simply *spend* the extra on something not an asset (cruise around the world, etc)?

Oh, and does anyone else laugh at the notion that such a tax would only be one-time?

John Hall writes:

I would buy S&P500 options worth the difference between my wealth and 10mn* based on my views on the market. If I lose, then I would have lost the money anyway and I could probably use the loses to defer other income taxes. If I win, then I could have earned (depending on how I met up the options) sufficient that I would end up with more than I started with even after paying the tax.


*Shouldn't the maximum be $11.66181mn since that times 100%-14.25% is 10mn?

Bill writes:

Please provide clarification. Does the 14.25% net-worth tax apply ONLY to the net worth in excess of $10 million? If so, the $10 million is unaffected by the tax; it's only amounts above this threshold that are taxed. Suppose a person had net worth of $11 million. The tax would be $142,500. Why would someone give away $1 million to avoid paying a tax of $142,500, assuming the person's goal is to maximize net worth?

David R. Henderson writes:

@Bill,
Good question. I took Donald Trump at his word and so if you go a penny above $10 million, you get taxed on the whole $10 million. A penny below and you don't get taxed. As you might imagine, Trump is not the most careful person and he did not specify further.

Steve writes:

How is net worth calculated in this case? If you're somewhere in the neighborhood of $10 million are there effective ways to hide some of your net-worth on the relevant valuation date? Do accounts receivable count toward net worth? If not, you could lend your money the day before the relevant day and ask for it back the day after.

Richard writes:

For the wealthy person who is truly at the margin on giving money to charity, the amount would be well over $11.7M.

If someone with $14M valued making a charitable donation sufficiently to be indifferent to giving $4M to charity vs. keeping it in the bank, this tax will strongly encourage them to make the $4M donation.

In addition, if someone values giving a certain amount to charity, then giving before the tax takes effect is beneficial even if it doesn't push net worth below $10M. If the goal is to give $2M of $20M net worth, then better to do it before the tax than afterwards.

joecanuck writes:

"that means that anyone with assets between $10 million and $11.425 million would have an enormous incentive to give away $1.425 million."

not exactly. anyone with assets between $10 million and $11.425 million has an incentive to:
1) withdraw $1.425 million in cash
2) buy up $1.425 million of gold from a pawn shop
3) bury the gold in their backyard
4) claim they spent the money on crack
5) ???
6) profit!

how is the government supposed to prove that you used cash to buy buried gold and not crack?

Sam writes:

Just because they give away the money doesn't mean it has to go to charity. As long as the money goes to someone with a resulting net worth less than $10 million the tax is avoided entirely. Presumably, the donor can still access those funds.

Giving the money away to charity is a major tax deduction however.

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