The issue of a progressive tax on the ultra-rich has long been popular with many American Democrats, but such a policy would be unthinkable under a Republican administration and a divided Congress.
Now that the Democratic Party once again controls the White House and Capitol Hill, the initiative is officially on the table: On 1. In March, a group of Democratic lawmakers, led by Senator Elizabeth Warren, introduced a bill that would provide an annual tax for households and trusts with assets over $50 million.
With new bridges between traditional capital and the digital asset space emerging almost daily, high net worth individuals can convert their value to crypto more easily than ever. Could any statutory property taxes affect their willingness to do so?
Senator Warren’s bill, heralded as a tax on super millionaires, proposes a 2% annual tax on the net worth of each household between $50 million and $1 billion, and a 3% tax on households worth more than $1 billion. The authors of the proposal claim that the burden would fall only on the 100,000 wealthiest households in the country, or 0.05% of the top segment of the wealth distribution.
Lawmakers say the initiative could generate at least $3 trillion in federal revenue over a 10-year period – a pool of resources that could be used to support underfunded areas such as education, child care and infrastructure.
The bill must be approved by the US Senate before it becomes law. Although Democrats and Republicans are currently 50-50 even in the House of Representatives and Democratic Vice President Kamala Harris has a casting vote, most bills still need at least 60 votes to pass. As Bloomberg noted, Democrats hope to include at least some tax items in the budget bill that will be voted on later this year.
Critical in abundance
Unsurprisingly, the initiative was immediately condemned by the political right and the center, as well as by big business. A few weeks after the proposal was filed, the Wall Street Journal published several articles explaining why the property tax would do more harm than good.
It has been argued that a wealth tax on American millionaires and billionaires would affect the ownership structure of the US stock market: As large US investors are forced to sell their most liquid assets at a discount, their counterparts in countries where the assets are not taxed will be happy to buy them. The author of another article argued that the outflow of capital from the stock market due to the taxation of the super rich would reduce the value of everyone’s savings.
Billionaire Leon Cooperman told CNBC that he thinks the rich should pay more taxes, but that Mrs. Warren’s policy configuration makes no sense. He added: If the property tax comes through, start buying gold, because people will be looking for a way to hide their assets.
Wait, but can that gold be digital?
No place to hide
Of course, Cooperman’s joke about using gold to hide his assets is metaphorical – a reference to the kind of assets that are less visible to the government than those in bank and securities accounts. As for real gold, the IRS considers precious metals to be collectibles subject to long-term capital gains tax. Cryptocurrencies certainly do not fall into any of these categories, as they are neither collectible (unless they are unreadable tokens) nor less visible.
If the goal is literally to hide wealth, it doesn’t seem wise to use a value system that automatically relies on an open, immutable ledger. Maria Stankiewicz, director of business development at cryptocurrency exchange EXMO UK, told Cointelegraph: Today, the mass adoption of BTC is not closely linked to fiat money, but rather to its status as a transparent financial asset. Tim Byun, head of global government relations at cryptocurrency exchange OKCoin, added:
Taxing the ultra-rich has little or no effect on the rapid spread of digital assets for all Americans and non-Americans, especially bitcoin. It’s foolish to think that they (like everyone else) see bitcoin as a way to hide their wealth, since bitcoin leaves a permanent digital footprint.
According to Douglas Borthwick, marketing director at INX, the digital assets specialist, it is not advisable to think of digital assets and bitcoin (BTC) as a place to hide one’s wealth. While US taxpayers can still buy bitcoin on offshore platforms without being subject to strict know-your-customer and anti-money laundering regulations, there are serious risks associated with delivery and storage. According to Borthwick, millionaires tend to use different strategies:
They invest in high value assets to protect against inflationary buying. Think of the master’s paintings and property. There are many strategies that super-rich investors use along with their tax advisors to avoid higher taxes. I’m not sure digital assets will rule there.
OKCoin’s Buyin believes that the ultra-rich will continue to maintain their wealth through proven means because they have access to the best lawyers, financial advisors and consultants.
Even if digital assets don’t help mask the true value of a household’s net worth, there may be other ways to pay a hypothetical wealth tax to increase millionaires’ interest in crypto. Here’s one.
According to a January report by the nonprofit Tax Foundation on Tax Policy, a property tax of 2-3% could wipe out interest income from safer investments, such as bonds and bank deposits. This could prompt high-net-worth investors to rethink the structure of their portfolios and realign them with riskier but higher-returning assets.
In other words, a hypothetical tax could encourage the wealthy to invest in cryptocurrencies and crypto-derivatives to offset the stagnant returns of more traditional investments.
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