David Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: taxing wealth. With wealth taxes getting renewed attention ahead of the 2020 U.S. election, Rutgers Business School professors Dan Palmon and Jay Soled have put out a new proposal for taxing corporate wealth. Joining me now in the studio is Asha Glover who spoke with Jay earlier today. Asha, welcome back to the podcast.
Asha Glover: Thank you for having me.
David Stewart: So what is this proposal? What did Jay Soled talk to you about?
Asha Glover: So his proposal is for a value tax on publicly traded corporations, basically a corporate wealth tax. His proposal was recently published in Tax Notes. Like you mentioned, it joins a number of wealth tax proposals coming out ahead of the 2020 elections.
David Stewart: All right. Let's go to that interview. Jay Soled joined Asha by phone.
Asha Glover: Jay, welcome to the podcast. In an October 14th article in Tax Notes, you outlined your proposal for a value tax. Can you tell us a little bit about your proposal?
Jay Soled: Thank you first of all for having me on the podcast and what I want to do is share with you and your listeners what this supposed value tax is, and it also could go by the name of a corporate wealth tax. In a nutshell what it does is it imposes an annual tax based on the upward change in a corporation's net value. I think the best way to illustrate this is by way of example. So if you have a company that let's say has 100 million shares outstanding and each share is valued at $7 per share, suppose it went up to $10 per share. What that means is that by the end of the year, it went up by $300 million in value, right? Because you had $7 initially per share, 100 million shares, that's 700 million went up to $10 per share. Now the company's worth a billion. The difference between the two is $300 million. If you impose a 5 percent tax on that increase in overall net worth, the company you're talking about 5 percent on $300 million, that would result in approximately $15 million of tax being owed. So that in a nutshell is what my colleague Dan Palmon and I are proposing vis-a-vis this corporate wealth tax.
Asha Glover: OK. Can you explain the key differences between your proposed value tax and the wealth taxes we've seen introduced by Democratic presidential candidates?
Jay Soled: So bear in mind that my understanding is that there are two different kinds of wealth tax being proposed. One by the Warren campaign and the other by the Sanders campaign. In the Warren campaign, it's tax on individuals, not corporations, and it's a 2 percent tax on assets that individuals have in excess of $50 million and a 1 percent surcharge if they have assets in excess of $1 billion. So again, by way of example, if a taxpayer's net worth were say $100 million, they would pay a tax of $1 million. Why $1 million? Because that's $100 million less than $50 million that wouldn't be tax and you times that by 2 percent that would result in a $1 million tax. So the Warren approach, again, is just a tax on the wealth of individuals. Sanders has two components to his proposed wealth tax. First of all, wealth tax,very similar to the Elizabeth Warren approach, where the fundamentals are a little bit different. It's a 1 percent wealth tax starting at $32 million. It climbs as high as 8 percent if you have assets in excess of $10 billion. But there's a second component that the Sanders campaign has where it's on corporations. Any time the CEO, his or her income, exceeds the median worker pay like 50 to 1 and if that threshold is crossed, the corporation would bear an additional corporate tax of up to 5 percent. So the proposed value tax is vastly different than the tax I'm proposing because it's strictly on the change in a company's value over a one year annual period. It has nothing to do with individuals and it has nothing to do with CEO pay. So it's a vast contrast of what's being proposed by the two existing campaigns, the Warren campaign and the Sanders campaign.
Asha Glover: Can you tell us a little more about the value tax payments being used as credits? How will that work and what purpose will it serve?
Jay Soled: As presently conceptualized, the proposed value tax is akin to what was once known as the corporate AMT, which the 2017 act repealed, and the corporate AMT was the secondary tax on corporations. It broadened the corporate tax base so that in theory at least every corporation would pay some minimal tax and that corporate AMT in future years can be used as a credit to offset whatever normal corporate income tax was due. So by the same token, depending on how Congress wants to handle the proposed value tax, if corporations that had no corporate income for the current year under current law would pay no tax, they could pay a value tax this year. And next year when they actually owed a corporate income tax under the Internal Revenue Code, they could use the value tax to offset some or all the corporate income tax they might owe in subsequent years.
Asha Glover: Another feature of your proposal is that Congress would be able to permit special allowances in exceptional cases. What constitutes an exceptional case? And why is that a key component?
Jay Soled: When companies first start, when they first go public and there's an initial public offering, what might happen is that Congress decides that, gee, we don't want to impose on fresh startup companies. That may be too much of an imposition. So Congress may, emphasis on the word may, consider introducing a tax holiday for new companies because it's sort of getting its bearings. So that could be an exceptional case. In the case of a company that just initially went public, a year or two tax holiday. And in addition, if a company decides like many years ago, back in the 1980s, AT&T spun off several what were known at the time as Baby Bells. So AT&T spun off these companies and its value declined, right? Because it now had less net worth and its share value declined. In that case, Congress might want to create a new threshold at when the proposed value tax would apply. Those are two cases that come to mind. I'm sure there'll be others, but in most 99 percent of the cases, application of the value tax should be relatively straightforward. You just look at the stock price at the beginning of the year. Look at the stock price at the end of the year. See how many shares are outstanding at the beginning of the year. See how many shares are outstanding at the end of the year, and it's all done and it could be a simple schedule. And administratively, it could take 15 to 20 minutes for every publicly held corporation to determine the amount of tax that would be due.
Asha Glover: So why do we need a value tax? What are some of the benefits of it?
Jay Soled: All right. Let me start with a simple proposition that I think there's a national consensus that all corporations should bear some of the onus of paying something into the system. Why? Because our nation provides a tremendous infrastructure and labor force that catapults these companies to the success. It makes them some of the foremost economic powers in the world. So as a quid pro quo for that, they should bear part of the financial burdens associated with keeping our country fiscally sound. So the value tax starts with that proposition that every company should make some sort of financial contribution and as we've seen time and time again that when looked at the Fortune 500 companies for example, that a large percentage pay zero or little tax on an annual basis. So this tax would seek to eliminate that. The benefit to this proposal in contrast to the Warren and Sanders proposal, is it's very, very simple to administer. As I pointed out a few minutes ago that in terms of administration, a simple schedule, a tax to the corporate Form 1120. The Form 1120 is what every corporation files on an annual basis. It would really take very little administrative effort to be compliant with this proposed tax.
Asha Glover: One advantage of your proposed value tax is that it would raise a lot of revenue. The individual wealth taxes we've seen would raise less than $5 trillion over a decade. Could you describe the kind of revenue effects this proposal could have implemented during a previous tax year?
Jay Soled: Well, I just want to take a little bit of issue with your question itself because you said some of the wealth taxes would raise less than $5 trillion over a decade. Five trillion dollars is a serious dollar figure, so let me just start with that proposition that that's not small potatoes. Having said that, that proposed value tax, if you do a little bit of arithmetic, that right now stock, which is publicly traded in the United States overall is worth about $30 trillion. So if stock prices historically go up approximately 10 percent per year, at least that's been the historic norm. And currently the overall value of the New York and NASDAQ exchanges combined are $30 trillion. If that goes up by 10 percent, we're talking about 10 percent times $3 trillion. And if you do the arithmetic on that, that if you impose a 5 percent tax on that number, you would get about $150 billion of revenue, which would yield about $1.5 trillion over a 10-year scoring period. Now of course, instead of a 5 percent tax, if you double that to 10 percent, that's $300 billion of revenue per year, $3 trillion over a 10-year scoring period. So I don't know exactly how much revenue this proposed tax would raise. It really would depend on how Congress wanted to calibrate it. Do they want to impose a 5 percent tax, minimum tax? Do they want to impose a 10 percent minimum tax, 15 percent? So it's very hard to know with specificity how much revenue this proposal with yield without knowing the tax rates. That's really a political decision. Folks in Washington first have to decide if it's truly viable and I think it is. And then once they decide it's viable, they have to decide exactly how much revenues they want to raise.
Asha Glover: Two University of California economists who have scored both Elizabeth Warren's and Bernie Sanders's wealth tax proposals have said that enforcement is the most important part of its implication. What parts of your proposal help prevent avoidance?
Jay Soled: I do want to emphasize that I think that both the Warren campaign and the Sanders campaign proposals are real problematic from a compliance point of view because they both engender annual valuations on in many instances what may be hard to value property, such as real estate, artwork, jewelry, and the like. So their proposals could result in a real boondoggle to the appraisal industry because every year, year in year out, people would be forced to value their property and that would be a lot of effort towards tax compliance. By way of contrast, there's no hiding what publicly traded stocks are being traded. Just look at the newspaper, go online and you can easily tell the January 1st date to December 31st date and you can compute the tax. So I think there's virtually no chance, and that's not easily said because I deal regularly with issues of tax avoidance and seeing what taxpayers do and don't do. But when it comes to this proposal, it may have other flaws, but not among them is the issue of tax avoidance. I think it would be very hard to avoid the imposition of this tax.
Asha Glover: What are the biggest disadvantages of the tax? Can any of those concerns be mitigated?
Jay Soled: Well, first and foremost, the number one concern that politicians might be weary about imposing this tax would be that of liquidity. You're imposing a tax on potential, what amounts to being potentially profitable companies, but they're not necessarily profitable companies. So there may be concern that, gee, Tesla, for example, the stock went way up, but there was no money to pay the tax. Well, I think that can be addressed by the fact that if the stock price is going way up and now there's this value tax to be imposed, the company can simply issue new shares and raise the necessary capital to pay the tax. So I don't think liquidity should be a real bugaboo, a real concern here, that subverts the ability of this tax to raise the revenue that it promises. So I'm going to put aside the liquidity concern. Secondly, will companies decide to not list their companies on U.S. exchanges because they're fearful that would result in the imposition of this value tax? At least for the time being, both the NASDAQ and the New York Stock exchanges are probably so intoxicating in terms of their ability to raise vast amounts of capital. And I don't think companies are going to necessarily shy away from lifting their companies because there's this value tax that would be imposed. So I don't think that would be a concern. And finally, some companies might choose to remain private or go private simply to avoid the imposition of this tax. And once again, I'm going to say I doubt that would be the recourse. The allure of taking a company public or keeping a company public is just so attractive for so many entrepreneurs that just keeping it private hand is not going to be something that they're going to gravitate towards. So yes, there are these concerns, but I think they can all be addressed and the administrative attractiveness at this proposal should be something that politicians on both sides of the aisle welcome. And the fact that going forward you would never read another newspaper article that shows these profitable companies paying zero tax is something that again, many politicians would find near and dear to their hearts.
Asha Glover: You've mentioned some of the proposals that focus on corporate tax, including Sanders's proposal to tax corporations for excessive lobbying. How likely are we to see a corporate wealth tax proposal on the campaign trail and how soon could we see it?
Jay Soled: This is one of the few proposals I think that many of your listeners and readers could easily understand in contrast to those proposals, which are currently being bandied about. So with this now in the public domain, now that Tax Notes has published its piece guarding the value tax, I'm hoping that one or more of the Democratic presidential candidates pick this up and say, gee, this is a great proposal and we want to put it as part of our platform. So I can't answer your question, but I'm hoping the sooner the better.
Asha Glover: The question of constitutionality has been a common one when we're talking about wealth taxes for individuals. Does your proposal face the same kinds of questions? If so, how does your proposal address that concern?
Jay Soled: Let me just make a general observation that most commentators, I believe, would say that a corporate wealth tax is less vulnerable to a constitutional challenge compared to a wealth tax, which some, not all, there's many people would say otherwise, constitutes a direct tax on individuals. And the direct tax has to be a portion and it could prove problematic. Again, I think the majority of commentators I've read to date say that a wealth tax on individuals would pass constitutional muster. In my opinion, when you have a wealth tax on corporations, which is not a direct tax on individuals, it's far, far, far more likely to pass constitutional muster. But I do think the question you pose is a challenging one and I'll conclude by saying it's certainly worthy of another podcast.
Asha Glover: Well, thank you so much for talking to us today, Jay.
Jay Soled: Well, thank you very much for inviting me.
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