Randall T. Shepard: Indiana is example of why Warren tax is bad idea

Over the year or so that Democratic contenders for the presidential nomination have been at work, Elizabeth Warren has now brought the contest to an important question—how to pay for the multiple proposals on new government spending.

The programs around which so many contenders have circled are well known: Medicaid for all or something very much like it, free public college education, Social Security benefits substantially above current levels, and elimination of student debt, to name some of the most prominent.

How the candidates propose to raise enough money to finance these proposals is important to evaluating their credibility. A good many of the candidates have spoken about rather traditional devices like raising income tax rates, increasing tax rates on capital gains, and collecting more through the inheritance tax.

Still, it seems apparent that these and other ordinary routes will not begin to produce enough money to finance the programs promised by the leading contenders. Credit Sen. Warren for putting forward a new way the feds could collect tax money. The government should tax peoples’ income through all the traditional methods, she says, and we should also tax everything they own.

Indiana residents might well say, “We’ve seen this movie before.”

For most of the 20th century, our state imposed what was called an “intangibles tax.” Residents were required to calculate the fair market value, on Dec. 31, of any retirement accounts, stocks and bonds, bank accounts and the like. They reported this total on their tax return, and they owed the state 2% of that number, in addition to whatever tax they owed on earned income.

As you can imagine, it was a particularly unpopular tax. A common complaint went like this. “I worked for a salary and I paid tax on my salary and managed to save some of it for retirement. Now they want to tax what I saved a second time.”

In the late 1980s, two lawsuits challenging the tax as unconstitutional produced rulings invalidating the intangibles tax. The turmoil and criticism led the General Assembly to repeal the tax altogether during the first year of Gov. Evan Bayh’s term. The Indiana Supreme Court later held that the tax had been constitutional, but the repeal stood.

Elizabeth Warren’s proposals for taxing what people own goes well beyond the Indiana intangibles tax. She says the government should tax 2% (an irony, to be sure) of all assets people own. Like IRAs, 401(k)s, homes and other real estate, personal possessions, bank accounts, mutual funds.

However, Warren says most Americans wouldn’t be touched by her tax because only the wealthiest would owe it. Of course, that’s what proponents of the original federal income tax said a hundred years back. It did in fact start out that way. The initial rate paid by most Americans in 1913 was 1%. The wealthiest paid 7%. Just three years later, the rate for working Americans was raised to 7% or 9%; the new rate for the well-to-do was 54%.

I think most Americans are savvy enough to know that the Warren tax would soon enough be headed their way. Her declarations that we need to make those “who suck billions out of our economy pay their fair share” have to be measured in light of decades of political history.

Sen. Warren has been the most forthcoming on future taxes, but on the general strategy, she has plenty of company. Bernie Sanders, for example, has urged a tax on “Wall Street profiteering,” by which he means taxing the things like the fees on the index fund in your IRA. A hefty majority of the fees to manage such assets are in fact paid by average Americans.

They’re very much at risk in the current wave of tax proposals.•

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Shepard, formerly Indiana chief justice, now serves as senior judge and teaches law. Send comments to ibjedit@ibj.com.

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