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5 Questions and Answers to Understand the Danger of the Wealth Tax

Impuesto a la riqueza

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[Leer en español]

“When the river sounds, it is because stones brings”, so the saying goes. With the latent possibility of Joe Biden landing in the White House, there is quite a bit of concern within the financial and economic sectors, and it has to do with the dangerous wealth tax. A tax that, according to Martin Litwak, an Argentine attorney specializing in estate planning and tax, will end up hitting the people with fewer resources more than “the rich. In addition, it discourages investment and savings, without generating almost returns to the treasury in the medium or long term.

Emmanuel Alejandro Rondón: As a lawyer and a person specialized in the field of estate planning, what do you think about the wealth tax?

Martín Litwak: As a lawyer who seeks to protect his clients’ assets, any tax seems to me to be negative or a necessary evil. There are four types: income tax and consumption tax, which are somehow the least bad, because any country has them; then we have the transaction tax, which is not good because it discourages investment; and finally the estate tax, which is the worst of all because it does not encourage savings, it does not encourage investment and therefore does not encourage growth, it does not encourage employment and any of these taxes ends up harming the one who has the least.

The wealth tax is in the latter category along with the concessions tax. These are two very bad taxes that discourage a country’s growth. So, in the short term, if it is paid by the richest, but immediately afterwards it ends up being paid by the employee in a relationship of dependence and not by the millionaire or the one who has the whole economic issue resolved.

Emmanuel Alejandro Rondón: Argentina is, as you well point out in your books and articles, a tax hell. That is to say, a country that against all logical and economic sense puts taxes in the hands of its citizens. Now there is a new wealth tax that is about to be approved in the Senate. How would this tax affect the Argentine economy?

Martín Litwak: Argentina, as you said, has already had no margin for taxation for a long time. The fiscal effort, which is the important concept that shows how much a person has to work to pay taxes in Argentina, is an absolute record in any country in the world. The tax burden does not matter, because it measures or links the GDP [gross domestic product] to the revenue, but it does not take into account what it takes for an Argentinian, in this case, to pay that tax.

Argentina is totally overtaxed. And what’s going to happen is what I told you before. First of all, “the rich man”, we are talking about a person who has one and a half or two million dollars, which is very good, but he is not a person with a large fortune as one is thinking here in the United States.

That tax is not going to Bill Gates, Jeff Bezos, no. The tax is intended for an upper-middle class person and what it is going to do is discourage savings. This person is going to say, “What good is saving if I get a tax? Better not to save, better spending”; and the spending is not good for anything, it is not an investment.

Then the only thing that is generated is that people either don’t pay it, or they structure themselves and somehow avoid it, or they spend money instead of saving. It’s not good for the treasury because it’s not a tax that’s going to collect much, and it’s bad for people.

On the other hand, to finish answering this question, we all know that the economy of a country is not a series of watertight compartments, but rather they are communicating steps. I as a government cannot determine who will pay the taxes, except initially. But I can never determine who will have the burden of that tax.

If I impose a higher tax on a “rich man” who produces, for example, car tires, that man will still raise his prices because he will say, “Look, in order to live the way I used to live, I’ll put that tax on the tire” and that’s it.

The U.S. and the Danger of a Wealth Tax in the Heat of a Pandemic

Emmanuel Alejandro Rondón: Going that way, these taxes are seen mostly in tax hells like Argentina and, although there are legal disputes in several swing states, it seems that the next president of the United States will be Joe Biden. It has been reported that under a Democratic administration there would be an attempt to impose a tax on wealth. Would it be the same tax that we see in these tax hells?

Martin Litwak: It’s basically the same thing. There are two taxes that Democrats have been talking about during the campaign: one is the wealth tax, which here, a priori, would be paid by the first large fortunes as opposed to Argentina, but the effect is the same: it is a tax that goes against savings and discourages investment.

That on the one hand. On the other hand, there is the idea of raising the tax burden of income tax for those people who earn more than 400,000 dollars. That’s punishing the people who invest the most in the country, who give the most work, who take the most risks, who lend the most, which is a pretty silly concept.

So, that’s two bad taxes. In fact, the personal income tax is the highest bracket at 37.9%. You should think about lowering it, not raising it. Trump’s tax reform in that area was unfinished, it lowered the corporate income tax a lot, to 21%, but it didn’t lower the personal income tax, the individuals.

Impuesto a la riqueza, Wealth Tax , Joe Biden
There is concern that the wealth tax will come to the U.S. under a Biden administration. (Flickr)

Emmanuel Alejandro Rondón: With a global recession, with an economic crisis, how beneficial or counterproductive can a wealth tax be?

Martín Litwak: There is never a good time to implement this type of tax, and in times of recession even less so, because you need investment to move the economy. And a worrying thing, which I mentioned the other day on Twitter, this pandemic is generating a wave of tax increases. Even countries that lowered taxes at the beginning are thinking about raising them.

This leaves a wave of countries that want to impose the wealth tax, which was being eliminated around the world in the 1990s, in the 2000s, 2010; it’s three decades that the tax was being eliminated everywhere. For example, at the time, out of 14 countries that were in the OECD, only four had it, which means that the trend is always towards its elimination.

But suddenly the rumor begins in the United States, there is a bill for a half-sanction in the House of Representatives in Argentina, there are bills presented in Bolivia, Chile and Peru; and if this happens, if the tendency is really to raise taxes, especially property taxes, the pandemic is leaving us the seed of the next global economic crisis. That it will not be a crisis of mortgages, nor of debts, it will be a crisis of lack of investment.

Emmanuel Alejandro Rondón: Finally, is there any possibility that the wealth tax will benefit the United States or any other country that implements it?

Martin Litwak: In the very short term it is going to benefit countries like the United States, where there is a large stock of wealth. That is to say, that which is not even going to happen in Argentina, where the first collection will not be important, in the United States it will be and it is going to bring some relief to the State’s coffers.

But let’s not forget that what Biden is thinking and proposing is to increase spending, especially on health. So, if you are going to increase revenue to increase spending, in the end, the result is neutral or it could be negative.

Then it will be positive if they do not increase spending and a flow of money enters the State. But if you increase spending and you continue to increase it and spending does not make much sense, there is no tax that will reach.

Emmanuel Alejandro Rondón is a journalist at El American specializing in the areas of American politics and media analysis // Emmanuel Alejandro Rondón es periodista de El American especializado en las áreas de política americana y análisis de medios de comunicación.

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