A Tax the Wealthy Can Get Behind

NEW YORK ( TheStreet) -- Trapped in a bitter conflict the wider public tunes out, politicians have lost sight of one key to unlocking a "Grand Bargain" in America's long-smoldering budget fight.

This country's small yet powerful investing class might now enthusiastically support an "extraordinary" one-time tax on net worth, if it's accompanied by profound reform in the way our government spends money, monitors its finances, and treats those seeking to create, preserve and protect wealth.

Implemented consensually and not via populist-inspired confiscation, a new compact toward shared prosperity just might work fast enough to convince frightened global investors that the U.S. can regain economic sanity.

A Case for a Tax on America's Wealth Mountain

The U.S. continues to operate out of fiscal and monetary control.

If America were deemed a "developing" nation and were no longer able to create securities accorded value on global markets, the International Monetary Fund long ago would have screamed at Washington politicians.

Even with benefit of global support for blank checks written by the Federal Reserve, there is no credible way of paying off the U.S.'s enormous debt if we rely on increased income taxes alone.

The table below shows how much total collections of personal income taxes would have to increase to close the Federal Government deficit for each of the years from 2002 through 2012.

Figure 1: Absolute Value of the Federal Deficit as a Percentage of Personal Income Tax Receipts

Source: Bureau of Economic Analysis National Income and Product Account Table 3.2 Federal Government Current Receipts and Expenditures. Note that figures used in calculating the Federal deficit are total expenditures and total revenues shown in the Addenda section of the table.

Yes, from the depths of fiscal depravity in 2009, politicians made "progress" reducing the federal deficit. Still, America remains far away from proving we manage our own government finances using a semblance of prudence.

Even with goodwill in Washington, no set of politicians now will vote for doubling personal income tax collection to close a $1.1 trillion gap between the 2012 run-rate for federal expenditures and federal receipts.

Meanwhile, no reasonable scenario, starting from the present, forecasts sustained increases in household income sufficient to swell income tax receipts meaningfully.

In stark contrast, household incomes likely will remain under assault given foreign outsourcing opportunities and proliferating options to replace human labor brought to the fore by advancements in technology.

To cure our fiscal woes, why rely primarily on income or new, far-reaching consumption taxes, when there may be a politically "painless" alternative?

According to estimates prepared quarterly by the Federal Reserve, the pile of wealth (defined as "net worth") controlled by American households and nonprofit organizations stood at $74.8 trillion on June 30, 2013, 16.3% higher than the previous peak level of $ 64.3 trillion on Dec. 31, 2007.

Why boost income taxes by gigantic percentage amounts to close annual government deficits when one might tap all households for a "measly" 1.5 % of total household net worth, or just the truly rich for a higher percentage?

After all, according to one estimate by Professor Edward N. Wolff, the top 20% of American households held an average of 84.1 % of total net worth and an average of 92.3 % of net worth excluding personal real estate, measured every three years between 1989 and 2007.

Figure 2: Estimated Shares Held by the Top 20% of all U.S. Households of Net Worth and Household Income

Source: The Size Distribution of Wealth and Income, 1983-2007 in Edward N. Wolff, "Recent Trends in Household Wealth in the United States," published in March 2012 by the Levy Economics Institute at Bard College.

This heavily skewed distribution of wealth is far less egalitarian than the frequently decried distribution of American household income. According to the same study cited above, household income for the top 20% averaged "only" 57.3% at slightly different measuring points every three years from 1988 through 2006.

Could the richest among us be enticed to cure America's vexing economic ills by "contributing" a small portion of their monumental holdings?

Why Rich Voters Might Cheerfully Surrender Some Wealth

Investor enthusiasm for a wealth tax would only come as part of a comprehensive deal in which the government and Federal Reserve embrace a "sound dollar policy" and subjected themselves to rigorous reshaping.

Considering alternatives to restoring true economic progress inside America, too many ignore toxic effects from the undeniable decline in the value of our dollar since 1999 when performing their analysis of options. This decline, measured against prices of essential raw materials and precious metals, means that investors in dollar-denominated securities fight against punishing headwinds.

America's weak-dollar delirium is as inexplicable as it is foolhardy -- it harms us, destabilizes the wider world and crushes the poor in rising nations.

Given the indisputable reality that exports are not a large enough portion of the U.S.'s annual output, that the U.S. accumulated wealth far exceeds its output, and that no large and sound alternative exists to our dollar, why do we punish the globe and ourselves with a weak currency?

If America's largest investors were convinced that empowered auditors might thoroughly evaluate the soundness of the Federal Reserve, that required equity would be invested promptly to shore up the Fed, and that its mission would change to protect the value of our currency, most would cheerfully advance funds required to bring our annual federal deficit and monstrous federal debts back under control.

For these wealthy investors, interest rates set at levels seen since 2008 for overnight federal funds and for benchmark, 10-year Treasuries make little sense.

At present, policymakers resolutely believe the laws of supply and demand no longer apply to the American currency or to debt securities of the federal government.

Given delusional behavior exhibited in Washington by both parties in delaying the inevitable massive pruning that must occur to government services, prospects for the approach suggested herein will be muted at best, and histrionic at worst.

But is there any other realistic hope that Democrats and big-government Republicans might wean themselves from the ruinous spending course we run?

Abandoning policies I characterized starting in May 2009 as a "War in Wealth" and adopting truly equitable investor-friendly programs means that outsized portions of the vast wealth accumulated worldwide would elect to remain here.

Instead, Will Politicians Puncture America's Allure Permanently?

The world watches in fear that the U.S. cannot get government finances in order fast enough.

The world's wealth has no safer home, at present, then the one here, even though it's aflame in populist rhetoric that "billionaires and millionaires" painlessly could cure all ills if they only did their patriotic duty and followed impulses of anointed government masters, leaving Washington D.C. whirling out of effective control.

Those who believe this unstable situation can remain forever benign in wide impact should reacquaint themselves with a short paper written in 1992 by Hyman Minsky titled The Financial Instability Hypothesis.

The truth is that stories of renewed prosperity since year-end 2008 are not even fairy tales -- those have happy conclusions. Few assets priced and few financial statements struck since Dec. 31, 2008 would look attractive if key benchmark interest rates remained in pre-2009 historic relationships.

The Federal Reserve System has painted each American into a boxed canyon, from which none of us will emerge unscathed before too long. Clear and present danger rises swiftly. Core inflation, measured consistently and fairly is set to surge as rising populations press for scarce inputs.

Many abroad now watch developments inside America in a mix of disbelief and terror. How can it be that cadres in China and Russia's leaders seemingly operate thousands of miles to the right of Washington, D.C. and New York City?

Meanwhile, elites in our power cities fear exposing and explaining financial truths -- after all, many of these enabled supposed progress, benefited since 2008 and may escape from the looming pain now staring us fully in our faces.

Credible return to a "sound" dollar policy will help all Americans and especially the wealthy. This approach is the only reasonable course averting final descent to financial hell from purgatory we entered last September 2008.

Alternatively, should the U.S. ignore centuries of economic history, soon we shall actually suffer the fate of sister nations located in this hemisphere such as Argentina, Uruguay, and Venezuela.

Better, a wealth tax and far-reaching equitable reform fully explained to the public, than a diminished permanent reality in which all Americans suffer more than most may appreciate.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Charles Ortel is managing director of Newport Value Partners LLC, which provides independent investment research to professional investors.

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