Massachusetts Sen. Elizabeth Warren has floated a couple of wealth taxes to pay for her many proposed giveaways, and her latest may create incentives for wealthy couples to actually get divorced to avoid the tax and to cut their tax bills in half.
President George W. Bush’s Council of Economic Advisers and Harvard economist N. Gregory Mankiw said the way the wealth tax is structured, super-rich married couples could always split their fortunes in half by divorcing and avoid paying any tax. And that could save some couples up to $1 million a year.
“The Warren proposal entails a $1 million per year marriage penalty,” Mankiw said.
It’s fairly simple math to get around Warren’s tax, which would levy a 2% annual tax on wealth above $50 million, and a 3% tax on wealth above $1 billion. So a rich couple that is worth $100 million would pay 2% on everything above $50 million, totaling $1 million a year in taxes. However, if they divorce and split their fortune, they would each be worth $50 million and not owe any taxes.
The same would go for billionaire couples. If a couple is worth $2 billion, they could divorce and split their fortune, saving them about $10 million a year.
As long as the couples followed the legal process for getting divorced, the IRS would be unable to stop them unless Congress were to pass some sort of new legislation.
“I don’t know of any cases where the IRS has stepped into a legal divorce and challenged it,” Marcum tax and services leader Joseph Perry told CNBC.
Warren’s team projects their wealth tax would raise $2.75 trillion over the next 10 years and claim tax avoidance would be limited due to better IRS enforcement.
But Mankiw and other economists argue that tax avoidance strategies by the rich would greatly reduce Warren’s projected windfall.
Two economists, Emmanuel Saez and Gabriel Zucman, helped Warren with her plan, and they say the exemption for individuals could be lowered to $25 million, meaning couples worth $50 million that divorced would still pay the tax.
“If singles get an exemption only half of the married (say $25 million instead of $50 million), divorcing does not help, unless you remarry a pauper,” Saez said. “Because 80% of top wealth holders are married, the proposals generally don’t focus yet on this issue as it complicates the presentation of the tax.”
Editor’s note: If they could simply cut it to $25 million, as Saez said, who’s to say they wouldn’t lower it to say … $1 million or even lower at some point down the road?
