Wealth Taxes Should Be Applied to Corporations, Not Individuals
We should tax companies by printing new shares of them, not collecting USD
As our economy digitizes, and technologies like AI and robotics advance, large portions of the American workforce stand to see their negotiating power as workers decrease. The period of employment instability that these technologies usher in may be “transitory” (although need to be careful with that word these days, given it was also being applied to inflation). However, few dispute that in the long-run, much of what Americans do for work today can be automated, at least in principle. This shift has the potential to lead to a tremendous increase in already high wealth inequality. The U.S. needs a tax regime that simultaneously addresses the sources of inequality present today and prepares for the changes that low-cost software, advanced AI, and robotics will bring. We have an imperative to ensure that the benefits of advanced AI accrue to all Americans, not just those who own the technology companies building these advances.
However, everyone getting more of what they need depends on economic growth. Redistributing the economy we have today evenly is both politically dangerous and would in fact leave everyone off less rich than they would be if we just left our economic growth engine chugging along and gave everyone some exposure to it. Many of the proposals to tax the incredible fortunes made in the digital economy today risk killing our golden-egg laying goose and ultimately stifling growth.
There is an idea for how we might tax enormous concentrations of wealth without punishing them and dis-incentivizing investment that I’ve seen addressed only sparingly. I think it should get more attention: a corporate wealth tax, denominated in ownership equity of the companies being taxed, not a wealth tax on individuals.
The Current Wealth Tax Proposals Would be Tough to Implement and Tempting to Dodge
Automation technologies have the power to catalyze tremendous economic growth throughout the U.S., bringing down costs for vast numbers of goods and services. However, they also threaten (but by no means ensure) persistently lower employment, at least under today’s definition of “employment”, even if the jobs that continue to exist see wages rise because of increased productivity. We need a tax system and an economy that provides a safety net for those trying to retrain to find new ways to work in this quick-shifting world. Additionally, as it becomes harder and harder for ordinary people to uniquely contribute to activities traditionally considered economically valuable, we need to build a country where an individual’s survival does not depend on holding down a formal job.
There are several existing proposals for how to simultaneously prevent egregious inequality and fund an expanded social safety net. One example is a wealth tax levied on affluent individuals, usually annually, at a percentage of their net worth. Another alternative being advanced by Senate Democrats would tax unrealized capital gains as though they were income. However, all of these proposals have serious flaws:
They apply to illiquid assets, like real estate, art, and privately held corporations, all of which it may be very difficult to sell “just a slice” of, unlike publicly traded companies. Since the tax needs to be paid each year, the owner of an appreciating illiquid asset would have a large cash bill due that might be difficult or even impossible to pay without selling the entire illiquid asset.
The biggest problem with taxing unrealized gains: Let's say you start a company, and it starts doing well. The market value of the equity you have goes up. You owe tax on it.... way more than your cash. So you're *forced* to sell any time it goes up to get $ to pay tax.US Treasury Secretary, Janet Yellen, suggests imposing a tax on unrealized capital gains. This means stock gains will be taxed even when they have not been sold. It also means that taxes will be owed when the value of a home appreciates, even though it has not been sold. https://t.co/H4ObEgZURe
Mr. Whale @CryptoWhale
Illiquid assets are much harder to value, since they sometimes are only sold once every couple of decades, making it difficult for the IRS to discern how much they are actually worth. Obscuring the true value of illiquid assets would become a massive source of tax evasion.
Because these taxes are levied on individuals, as opposed to the corporations that are actually earning revenue, they encourage capital flight and offshoring. The extremely wealthy might simply leave the U.S. to avoid paying the tax.
Accountants HATE Him: Corporate Equity Taxes Simplify Everything
For these reasons we should instead attempt a “corporate equity tax”: tax corporations in dilutive new shares of stock, as opposed to taxing them in dollars measured against their profits. Rather than increasing taxes on corporations’ gross income, corporations will be taxed through a requirement that they annually issue new shares that are either given to the U.S. government or, more speculatively, distributed to Americans directly.
An example: If a corporation is valued at $2 trillion, split across 20 billion of its shares, this form of tax might require that the corporation creates 300 million dilutive new shares (the equivalent of 1.5%) in the following year, and pay them to the IRS as a tax.
This proposal has several advantages over the existing options considered for wealth taxation:
Taxing shares directly, as opposed to profits, aligns the incentives of existing investors with the tax recipient. If ownership is directly diluted, the current incentive for corporations to hide or delay formal profits is removed. Everyone still wants the stock price to go up.
Taxing through dilutive equity ownership removes the need to correctly value private or illiquid assets, since it is possible to issue new equity ownership to the government even without knowing the true value of that equity. You can apply the tax to both privately held and publicly traded companies, and you even need fewer accountants, since in the limit companies no longer need detailed books on expenses and profits. Just dilute ownership directly.
Since the tax is levied on corporations, it can be implemented in such a way that it doesn’t encourage offshoring. For example, companies could be subject to the tax if a certain percentage, or gross volume, of their sales come from within the U.S. no matter where they are legally domiciled. This would be much easier to measure than the location of a private individual’s wealth.
The final, and strongest, argument for a share-denominated corporate tax is hard to quantify: if every American has a direct stake in in our country’s largest companies, then everyone will tangibly share in the upside that capitalism creates. The feedback loop from corporate innovation to economic benefit to all Americans will be much tighter, making it harder to scapegoat those who are actually growing our economy, and easier to draw the connection between growth and everyone’s well-being.
Implementation Details
The eventual aim of a disbursement from this kind of tax would be to ensure the benefits of advanced automation technologies are spread to all of society, as opposed to letting benefits primarily accrue into the hands of existing shareholders. However, a few important details might influence the political support and legislative success of this new policy:
The size at which corporations become subject to the tax would need to be determined. The equity tax could apply to all corporations, but it might be more feasible to apply above some threshold of market share or valuation.
Equity taxation would create at least a small incentive for corporations to return value to existing shareholders as opposed to reinvesting in growth, because, like any tax on assets, they increase an investor’s discount rate.
Once the equity is collected by the IRS, the question of who receives it, in what form, and when remains.
Corporate equity taxes cannot easily be extended to non-equity assets, especially ownership of land. Diluting individuals’ ownership of land directly would risk a massive political backlash, as the political base of voters who own majority stakes in plots of land is much larger and less wealthy on average than that of major stockholders in corporations. Ultimately, the fair thing to do is implement the equity tax across all types of asset.
Although the full implementation of corporate equity taxation will take time, there are incremental steps available to build towards this future today. The IRS could begin by simply allowing corporations to pay their tax bills in dilutive equity, and providing an incentive to do so, to establish the infrastructure for this type of taxation. For the time being, the IRS could be required to liquidate these shares upon receipt. Allowing tax payment in stock will establish an important piece of the infrastructure for a corporate equity tax today and lay the groundwork for evenly distributing the benefits of advanced AI tomorrow.