Donald Trump's Plan to Tax the Forgotten Wealth: Trump's Ill-Conceived Proposal Won't Stop Soaring Federal Debt

Americans are increasingly tempted to impose a wealth tax. Several bills in Congress propose to tax and redistribute wealth, with the goal of benefiting the poor and “ensuring the wealthy pay their fair share,” in the words of President Joe Biden. Biden and U.S. Senator Elizabeth Warren (D-Massachusetts) have put forward the most widely debated proposals for wealth taxes.

What is largely forgotten, however, is that Donald Trump had launched a wealth tax project 20 years before Warren, when he was considering running for president as the Reform Party candidate in 1999. propose a single flat tax of 14.25% on the net worth of individuals and trusts over $10 million.

Trump’s wealth tax would have raised an estimated $5.7 trillion in federal revenue, which he wanted to use to pay down the entire federal debt at the time, eliminating $200 billion in annual debt-servicing costs. He wanted to use the debt-servicing savings to fund a $100 billion tax cut for the middle class and transfer $100 billion to Social Security each year.

“According to my calculations,” Trump said said at the time“1% of Americans, who control 90% of the wealth in this country, would be affected by my plan. The other 99% would benefit from significant reductions in their federal income taxes.. . . . It’s a win-win situation for the American people, an idea that no conventional politician would have the courage to put forward.

While eliminating the federal debt is a laudable goal, Trump’s plan was ill-conceived in two respects. federal debt can be repaid without imposing a new tax, particularly on wealth. The taxation of wealth has serious shortcomings, as I explain in my recent article title, “Wealth tax proposal threatens jobs, savings and privacy”, published in Bloomberg Tax’s Tax management memorandum (June 2024).

In a word, wealth taxation:

East complex and expensive to implement.
Discourages investment, innovation and entrepreneurship.
East quickly considered unfair because of the special exemptions are distributed to politically connected people.
It undermines privacy, private property, economic growth and wage growth for ordinary workers.
Can Their implementation costs more than the revenue they generate, because, among other factors, capital and residents flee to other countries.
East unconstitutional as generally conceived.

Wealth tax would be bad for America.

Second, Trump claimed in 1999 that his wealth tax “would make this country completely debt free “We are entering the next millennium.” Eliminating the federal debt once, however, does nothing to prevent future budget deficits and future debt accumulation. Without further action, Trump’s plan would have reduced the federal debt to zero, where it would start growing again, requiring another round of wealth taxes in the future, and then another.

In their 1977 book entitled Democracy in Deficit: The Political Legacy of Lord KeynesNobel Prize-winning economist James M. Buchanan and economist Richard E. Wagner have argued persuasively that the “Keynesian revolution” in economics, which began in the 1930s and continued beyond, represented a “change in thinking about public debt” that was “essential to gaining acceptance of deficit financing. There was no longer any reason to oppose deficit financing on essentially moral grounds.” The rise of Keynesian prescriptions among economists, politicians, and members of the media, caused a change in the “fiscal constitution,” leading to increased federal government spending and deficits, even in peacetimeand that paved the way for the debt explosion and price inflation that followed.

Before the 1930s, the dominant ethic among policy makers and the public was that spending should be limited and that the accumulation of budget deficits and public debt was both immoral and harmful to the economy, especially in the long run. This ethic “was an unwritten part of our Constitution,” wrote Richard E. Wagner and Robert D. Tollison in Balanced Budgets, Fiscal Responsibility and the Constitution (1980). Furthermore, James Buchanan pointed out in Freedom, Market and State (1986) that Keynesianism ended the “Victorian fiscal morality” of balanced budgets and little debt, and that this led to the “modern age of prodigality.”

In 1977, when Democracy in deficit was released, the federal debt was $699 billion ($3.49 trillion in 2023 dollars), according to the US Treasury Departmentequivalent to 35 percent of annual gross domestic product (GDP).

In 1999, When Trump first proposed his self-proclaimed wealth tax to eliminate the debt, the national debt stood at $5.66 trillion ($10.33 trillion in 2023 dollars), or 60% of GDP.

Today, the debt stands at $34.95 trillion, or about 123% of GDP, a record high. The World Bank considers that a country be in taxation worry if its long-term public debt-to-GDP ratio exceeds 77 percent. A country’s annual real GDP growth rate declines by 0.02 percentage points for each percentage point above 77 percent. The cumulative effect over time on real GDP growth and prosperity can be significant.

Debt levels have increased tenfold in real terms since 1977, a staggering amount. Depending on the estimates you trust, the national debt has increased by $6.5 trillion during Trump’s presidency alone, according to the conservative Heritage Foundation, or $8.4 trillionaccording to the Committee for a Responsible Federal Budget, a left-leaning organization.

Because moral opposition to deficits and debt has been eroded by Keynesianism, in its place Buchanan and Wagner propose that the Constitution of the United States to be modified to include a formal requirement for a balanced budget as follows:

1. The President shall submit annually to Congress a budget providing for federal expenditures equal to federal revenues.

2. Congress, both in its initial budget review, and upon its subsequent approval, will be required to act within a budget that provides for federal expenditures equal to federal revenues.There is of course, no requirement that the congressional budget be the same as that submitted by the president.)

3. In the case where projections prove it error, and a budget deficit exceeding specified limits occurs, federal spending will automatically be adjusted downward to restore projected balance within a period of three months. If a budget surplus occurs, the funds will be to be used For retirement of national debt.

4. Provisions of this amendment will be do fully into force within five years of its adoption. To achieve an orderly transition to full implementationannual budget deficits must reduce by no less than 20 percent per year in each of the five years after the adoption of the amendment. The deviation from this 20 percent rule for an annual downward adjustment in the size of the deficit must to be treated the same way as departure Since budget balance after full implementation.

5. The provisions of this amendment may only be waived in the event of a national emergency, as declared by two-thirds of both Houses of Parliament. Congress, and approved by the president. National emergency declarations automatically expire after one year.

Buchanan and Wagner argued that a constitutional amendment to balance the budget was urgently needed to restore fiscal health. act for limit government spending and future inflation, prevent malinvestment, end government crowding out of the private sector from investment capital, and allow greater individual autonomy in spending decisions and, therefore, greater individual freedom. In their opinion, such a An amendment is the best (but not perfect) way to restore budgetary stability. However, it is important It is worth noting that politicians and courts have, throughout American history, had a history of devising clever schemes to circumvent constitutional protections.

However, Donald Trump’s ill-conceived plan to tax wealth did not provide for a balanced budget, so deficits and debt accumulation would have been allowed to run wild, as they have. Rather than being a one-off event, wealth taxation would likely have become a regular feature of American life, as deficits, debt, and excessive spending continued unabated.

Donald Trump’s plan to tax wealth was a bad idea in 1999, and it’s still a bad idea today, unworthy of resurrection.