A Celebrity Divorce Further Exposes the Wealth’s Tax’s Absurdity

a-celebrity-divorce-further-exposes-the-wealth’s-tax’s-absurdity
A Celebrity Divorce Further Exposes the Wealth's Tax's Absurdity

What do disputes about the value of the late Michael Jackson’s image and the divorce of Bill and Melinda Gates have in common? No, it’s not a joke, or at least not a very funny one — the answer is that they both highlight just how difficult administering a wealth tax would be.

As I’ve noted here in the past, one of the most significant issues any wealth tax must grapple with is how to value non-liquid assets. In order to calculate tax liability based on net worth, it’s necessary to establish how much a taxpayer’s assets are actually worth. That’s fairly easy for things like stocks and bonds, but it’s much harder for other things, such as, for example, a celebrity’s image and likeness.

Michael Jackson’s death in 2009 incurred an estate tax bill for his heirs, which necessitated a valuation of his image. When his estate filed its initial estate tax return, it valued his image at $2,105. The IRS, on the other hand, valued it at $434 million.

Twelve years and a 271-page ruling later, a judge ruled in favor of Jackson’s estate, valuing Jackson’s image at a far more modest $4 million. In his ruling, the judge had to consider how scandals and inability to land a sponsor for Jackson’s final “comeback” tour affected his image’s value.

Now, all that effort went into valuing Jackson’s image at a single point in time. Imagine if the IRS and Jackson had had to duke it out over how much his likeness was worth every single year of Jackson’s career, with all its peaks and valleys. Now imagine the IRS having to do that same yearly task with hundreds of wealthy celebrities and titans of business with the wild ups and downs of their public images. And finally, consider that that’s just one form of non-liquid asset the IRS would be tasked with valuing. You’re left with a task that would make Sisyphus getting that boulder up the hill look easy by comparison.

I’ve also noted in the past that another problem that any wealth tax regime would have to handle is how to deal with private foundation assets. The architects of Senator Elizabeth Warren’s (D-MA) wealth tax proposal have argued that rich Americans should have to pay tax not just on their private holdings but also the assets of private charitable foundations with which they’re associated.

Should a wealth tax become law and the decision is made not to fully exempt foundation assets, how to attribute them to taxpayers is a sticky situation. One potential “solution,” for example, would be to divide foundation assets equally among trustees. While both Gateses are reportedly staying on as trustees of the Bill and Melinda Gates Foundation along with Warren Buffett, their divorce could have changed the apportionment of the Foundation’s assets were a wealth tax in place. This could lead to changes in foundation administration solely for tax planning purposes, rather than for executing its important charitable mission.

It also highlights the complexity such a scheme faces as a private charitable foundation is more distant from the original founder or founders. Attributing foundation assets to a single trustee is thorny enough, but the difficulty only becomes more pronounced as trustees separate and generations pass.

Tax policy may not be the first thing that comes to mind with celebrity gossip, but even Michael Jackson and the Gateses can teach us a lesson about flawed tax policy from time to time. A wealth tax is about as flawed a tax policy as there is.

Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government. 

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