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One of my favourite pastimes is reading counterfactual histories…also known as “What If” scenarios.
This week one potentially epic “What If” tax policy battle was looming. Senator Elizabeth Warren invited the outspoken billionaire investor, Leon Cooperman, to speak before her Senate Committee on Finance. The purpose was to discuss Senator Warren’s wealth tax legislation entitled “The Ultra-Millionaire Tax” bill.
For those who are unfamiliar with Senator Warren’s proposal, I direct you to my recent blog, The Ultra-Millionaire tax bill: how it will accelerate capital flight! Here I summarise the basic elements of her bill and then identify some of its less favourable, but entirely predictable, consequences.
As for Mr Cooperman, his hedge fund, Omega Advisers, manages over US$3.3B. His personal net worth is estimated to be US$2.5B. In the last few years he has been increasingly outspoken about policies proposed by Democratic politicians such as Senator Warren.
“Too frightened”
Sadly for tax geeks who love a robust political debate, Mr Cooperman declined to enter Senator Warren’s kangaroo court. Given that Senator Warren had declined to respond either in writing or in a more equitable format to Mr. Cooperman’s previous statements on the Wealth Tax, it was not ungenerous of him to assume that Senator Warren was more interested in showboating on her turf rather than entering into a proper debate about the merits and issues of new tax policy. Predictably, Senator Warren used his non-acceptance as political fodder calling him “too frightened.”
In fairness, I should admit that if I had been advising Mr. Cooperman, I would also have recommended that he NOT appear. The format is very difficult for witnesses to navigate successfully. In the age of the 24-hour news cycle, these hearings have evolved largely to give certain Senators five minutes of questions to create soundbites for their campaign ads.
So this battle on of tax policy is not to be…or is it?
Since this is a debate worth having, why don’t we simply imagine…
“What if Senator Warren and Mr. Cooperman debated her Wealth Tax proposal in a properly moderated debate?”
In imagining this exchange, I do not claim to speak for either Senator Warren or Mr. Cooperman. Instead, I will refer to the Senator’s public record and then counter as I think Mr Cooperman would respond based on his previously written statements. All of this further supplemented by my over three decades of advising wealthy Americans like him.
Shall we begin?
Moderator:
Senator Warren, you have stated that your Wealth Tax is “simply two or three cents”. Of course, the real issue is two percent of what figure? How do you propose valuing assets which are not publicly-listed stocks, such as private companies?
Warren:
There are a number of different valuation techniques depending upon the assets. However, we anticipate that taxpayers will challenge the IRS valuation as too high. The solution to this problem is for the government to step in and create the market that is missing. The IRS would give the option to the taxpayer to pay the wealth tax in kind—for example with shares—rather than in cash. If they used this option (which they would do only if they believed the IRS valuation was exaggerated), the tax authority would then sell the shares to the highest bidders on a market open to any and all bidders. These could be venture capitalists, private equity funds, foundations, or other rich families interested in acquiring a stake in that company.
For a wealth tax imposed at an average rate of 2 percent, the taxpayer would hand in 2 percent of their shares each year. Alternatively they would submit the cash equivalent, if they prefer to retain full control of the company. Transforming the shares into cash would be the government’s job.
Cooperman:
Only an academic who knows nothing about hostile takeovers, Greenmail or how business competitors interact could suggest such a silly system. So now you want the government to get involved in investment banking? An area in which they have no expertise?
This proposal also opens the door for competitors to acquire shares in the auction. Most founders do not want competitors having minority shareholdings in their companies. This is for the simple reason that they may legally access confidential information under the guise of minority shareholder rights. If I were cynical, I might guess that the Senator knows this idea is a non-starter. It would leave the taxpayer with no real recourse but to accept whatever valuation that the IRS gives them.
Moderator:
How do you deal with the issue of liquidity to pay your annual wealth tax?
Warren:
They just have to sell some of their assets.
Cooperman:
Most entrepreneurs do not have ready liquidity and would need to sell assets. Logically, they would sell those assets they judge to have the lowest growth potential or least emotional attachment to them. This would probably be luxury goods which are trappings of wealth rather than generators of wealth. Unfortunately, most of the potential buyers are also people selling similar assets to pay their Wealth Tax, so the market will be artificially depressed. In short…a fire sale.
Moderator:
Is the Wealth Tax really an attempt to shift control from Strategic Philanthropy?
Warren:
I want to start by saying: Taxes are not philanthropy. Only we have so under-taxed those at the top that it has had two consequences. One is that it is part of the reason the wealthy been able to build such enormous fortunes: wealth itself for this top group hasn’t been taxed. The second consequence is they then get to use it in the ways they decide they want to use it. They want to direct money in the ways they want to spend it. And that’s fine, but that doesn’t relieve them of one penny of their responsibility to make a fair contribution to what it takes to run this nation and to run it not just for the benefit of the billionaires but the benefit of the rest of America.
Cooperman:
After agreeing to spend half of my year contributing to the US government in taxes, my major driving motive is NOT to have more disposable income to spend on lifestyle. Rather it is maintain control over the disposal of my after-tax wealth through Strategic Philanthropy.
Strategic Philanthropy comes down to the Anand Giridharadas vs Reid Hoffman debate. In short, should I:
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a) Pay significantly more in taxes and trust the government to decide on priorities and implement solutions to societal ills; or
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b) Use my skills, contacts and focus on determining and implementing Strategic Philanthropy in solving specific societal ills?
I have made hundreds of millions in charitable contributions. I have supported causes such as providing educational opportunities for talented but poor children. I have committed both publicly and personally to certain charitable causes that are close to my heart. For myself and my peers, the desire to maintain the ability to engage in strategic philanthropy is a powerful one.
In the academic paper which Senator Warren relied on for her Wealth Tax, there is a clear statement that assets contained in a foundation should be included in the Wealth Tax calculation. The example of the Bill and Melinda Gates Foundation is cited. The assets of their Foundation are included in the Wealth Tax calculation for both Bill and Melinda personally. It even goes so far as to include any outside contributions to their foundation such as Warren Buffet’s multi-billion dollar contribution. Such a tax grab is simply unconscionable.
I am confident in my prediction that if such rules relating to Strategic Philanthropy were put in place, many current donors would simply leave the US tax regime. Once outside the US system, they would have complete freedom to engage in philanthropy in the ways that they think are best.
Moderator:
Wealth Taxes have been dropped in most other countries because of Wealthy Taxpayers simply leaving the tax jurisdiction. Why do you think it will work in the US?
Warren:
The European countries which had and then dropped a Wealth Tax did so because they realised that Wealthy European Taxpayers had the ability to simply move to another European country. This is not the case for American citizens. They are taxed no matter where they live in the world and giving up US citizenship is an extreme move that is rarely going to happen. My proposal also has a 40% “exit tax” on the net worth above $50 million of any U.S. citizen who renounces their citizenship.
Cooperman:
It is a matter of public record that there has been a drastic acceleration in the number of Americans who have decided to exercise their legal right to leave the US tax system permanently. This involves getting another passport and then giving up their US citizenship.
While this may not be a step that I personally might take, I understand when my peers tell me that they are getting second passports through lineage or outright purchase. Personally, I could get both a Polish citizenship through my parents AND an Israeli citizenship under the Law of Return. I could then expatriate. I would pay any Capital Gains on the way out, and spend all my remaining net worth on Strategic Philanthropy in the way that I see fit. And I would still be able to spend a lot of time in the US.
Senator Warren has proposed to block such a legal exercise of rights by a FORTY PERCENT grab of the remaining net worth. This is AFTER THE PERSON HAD ALREADY PAID ALL CAPITAL GAINS.
I am old enough to remember a time when the US government heavily criticised the Soviet Union for putting a much milder “Exit Tax” on Soviet Jews who wished to move to Israel.
Leaving aside the irony of such an unjust confiscation from those who dare to express their disagreement with her politics, the reality is that Senator Warren is just super-charging the renunciation trend. Many of the targets of Senator Warren’s bill are rushing to get their Backup Plans in place to enable them to legally leave BEFORE her Wealth Tax becomes law.
The net result of such a proposal will most certainly be no windfall from the Wealth Tax; the loss of future Estate Tax revenue; and no more annual income tax revenue.
Way to go Senator Warren!
Moderator Question :
Is a Wealth Tax constitutional?
Warren:
There has been some question about the constitutionality of the Wealth Tax that has been raised by some opponents of my tax. However, I have some top legal scholars who agree that it is constitutional.
Cooperman:
This is a red herring. Whether or not the Wealth Tax is constitutional is a question for SCOTUS to ultimately decide. However, any decision would only be rendered after many years of us paying a Wealth Tax and incurring enormous legal fees. As I just described, many of my peers will do the math and avoid all that cost and uncertainty by leaving at the first sign that a Wealth Tax is likely to become law.
Moderator Question:
What is each of your final statements?
Warren:
A two-cent tax on the top one tenth of 1% of families in this country would permit us to fund universal childcare for all of our babies. All of their mamas and daddies could finish their education and be able to go to work. It would let us invest in K-12 for our kids. It would let us invest in universal free college. It would let us get rid of our student loan debt.
Cooperman:
After over 8 years in office, Senator Warren knows full well that any revenue from a Wealth Tax would go into general coffers. It would then first be spent on interest on the federal debt and then mandatory spending obligations such as Social Security, Medicare, and Medicaid. If any of that revenue remains for discretionary spending, then it will compete with military spending including Homeland Security, the Department of Veterans Affairs, and only then for all other domestic programs.
This is not about getting money for laudable goals such as early childhood education or supporting access to post-secondary education. As Senator Warren confessed on CNBC in January 2020, her Wealth Tax Proposal is really about punishing entrepreneurs and investors in an impossible attempt to reduce wealth inequality.
As I stated in my detailed letter of October 30, 2019, the US should be focused on increasing opportunity rather than tearing down success. In that letter I confirmed that I think that Wealthy Americans like myself should be contributing more towards the US government. I outlined a variety of practical ways of adopting tax policies that would have that result.
However, my fear is that Senator’s side in the debate is starting out with insults such as “pluts gotta plut, pandemic profiteers, etc. etc.” Meanwhile their targets are saying: “I certainly think I can pay more in taxes but I have to believe that number is reasonable”.
To move forward, legislators like Senator Warren should be engaging in good faith, respectful discussions with those who can and will contribute more to America. This should be done through a mix of increased taxation and targeted Strategic Philanthropy. Unfortunately, this discussion is being terminated prematurely and without success by the opening move of offering coffee mugs emblazoned with the words “Billionaire Tears”.
