by David Dayen Intercept Jan 24, 2019
SEN. ELIZABETH WARREN’S presidential campaign rolled out a proposal for an annual tax on wealth, becoming the first major Democratic candidate to follow a recommendation outlined in Thomas Piketty’s blockbuster book, “Capital in the Twenty-First Century.”
The proposal, according to two University of California, Berkeley, economists who are leading experts on wealth and inequality, would shrink the wealth of the superrich by $2.75 trillion over a 10-year period, while only affecting around 75,000 U.S. households.
A paper distributed by Warren’s campaign announcing the proposal notes that the United States contains “an extreme concentration of wealth not seen in any other leading economy.” As UC Berkeley’s Emmanuel Saez and Gabriel Zucman have demonstrated, the top 0.1 percent has had their wealth share nearly triple between the late 1970s and 2016.
Warren actually endorsed the concept of a wealth tax five years ago, in an interview with Piketty and The Intercept’s Ryan Grim. Asked how a bill to tax wealth would sound after Piketty described it, Warren said, “Oh, I’m in, I’m in, I’m in — in on the notion that we have to rewrite our tax code.” She added that the tax code “has to reflect the importance of work and people who achieve and people who accomplish, over being born into wealth.”
Piketty endorsed the Warren plan on Thursday. “In many ways, the US led the world toward the development of progressive taxation and the reduction of inequality at the global level during the first half of the 20th century,” he wrote in a statement. “I am confident that Senator Warren’s proposed progressive wealth tax will not only help curb inequality and ultimately promote growth in the US, but also have a major impact all around the world.”
Targeting wealth instead of income attacks a much larger source of inequality and economic distortion. Concentrated wealth has skyrocketed over the past several decades; an Oxfam study out this week estimates that the world’s billionaires grew their fortunes by $2.5 billion per day in 2018.
A large percentage of these daily gains are derived through capital ownership. Matt Bruenig of the People’s Policy Project has estimated that around 30 percent of annual national income comes from holding income-generating assets like real estate, stocks, and bonds. This is wealth created by owning wealth, and naturally, nearly all of it is earned by the wealthiest Americans. Increases to income tax rates, while important to curb income inequality, are mostly irrelevant at capturing capital income, or breaking up concentrated wealth.
America already taxes wealth in a minor way through property taxes, but that only covers one type of asset and does not really correspond to wealth, because homeowners owe tax on the property regardless of what they own in home equity. Some would say that taxes on inheritance are taxes on wealth, but they only come into play after death.
This wealth tax proposal, then, seeks to confront an untapped pool of wealth. While how and whether these revenues would be redistributed is not defined, taxing wealth in and of itself would make society more egalitarian. Indeed, modern monetary theorists regularly point out that the purpose of taxation is not to produce revenue for the government to spend, because the U.S. government controls its spending regardless of taxation. Still, there are numerous potential applications of the revenues that could compress wealth even further.
THE ULTRA-MILLIONAIRE Tax, as Warren’s campaign describes it, would impose a 2 percent annual tax on household net worth on all dollars above $50 million. An additional 1 percent surtax would kick in above $1 billion in income. Wealth is defined in the plan as “all household assets … including residences, closely held businesses, assets held in trust, retirement assets, assets held by minor children, and personal property with a value of $50,000 or more.”
These are marginal tax rates, which conservatives have busily tried to misconstrue during the debate over Alexandria Ocasio-Cortez’s proposed 70 percent income tax rate above $10 million. Households with exactly $50 million in wealth would pay zero dollars in wealth taxes; the first dollar above that would trigger a tax of 2 cents.
That the Warren tax would raise far more than Ocasio-Cortez’s plan is a function of the extreme concentration of wealth in the United States. “While we must make income taxes more progressive, that alone won’t straighten out our slanted tax code or our lopsided economy,” the Warren proposal paper explains.
The Washington Post credibly estimates that Ocasio-Cortez’s 70 percent income tax bracket would bring in $720 billion over a 10-year period. The wealth tax above $50 million, according to Saez and Zucman’s estimate, would raise $2.75 trillion, a number that is around 1 percent of national gross domestic product. The economists use the Federal Reserve’s Survey of Consumer Finances and other sources like the Forbes 400 list of the richest Americans to make the estimates.
Bruenig, of the People’s Policy Project, ran the same calculations as Saez and Zucman using similar data and got a yield of $1.9 trillion over 10 years. He added that this was a lowball estimate and that Saez and Zucman’s figures were plausible, “because I think their methods are plausible.” While Bruenig said that he would add a tax bracket between $10 million and $50 million to avoid “leaving a lot of money on the table by starting so high,” in general he endorsed the concept.
Saez and Zucman build into their figures an expectation of capital mobility, in which the rich hide their money in tax havens in response to attempted taxation. Based on studies of other wealth taxes around the world, and the details of Warren’s plan, they conservatively presume a 15 percent reduction in reported net worth.
Warren’s plan attempts to limit such evasion and avoidance. She would increase the Internal Revenue Service budget to enforce the new tax and apply a minimum audit rate for those 75,000 households subject to it, potentially reversing the long campaign to gut the IRS and let high net worth individuals skirt taxation. If the wealthy attempted to renounce U.S. citizenship in response, the plan proposes a 40 percent “exit tax” on all wealth above $50 million.
In addition, the plan would encourage the IRS to close loopholes in valuing assets that already are used in inheritance tax calculations. Plus, she would leverage the Foreign Account Tax Compliance Act to adopt third-party reporting and information exchanges with potential sites to park money, like Switzerland.
Those with high net worth but liquidity constraints — such as folks whose money is tied up in financial instruments or business ventures with long-term timelines — could defer payment for up to five years, but they would have to pay interest on what they owe.
The wealthy would still be able to enjoy the vast majority of their wealth. Saez and Zucman estimate that the top 0.1 percent will pay 3.2 percent of their wealth in taxes in 2019, and the wealth tax proposal would only increase that to 4.3 percent. Incidentally, the bottom 99 percent pays about 7.2 percent of their wealth in taxes, because they lack savings and rely heavily on labor income.
An annual tax on wealth exists in several countries around the world, including Spain and Norway. But it is a virtually unprecedented proposal in recent political memory. Sen. Bernie Sanders, in the wake of Piketty’s book, proposed a more progressive inheritance tax, but that would only trigger upon death. Sanders floated a wealth tax in a 1997 book, but never offered a formal proposal. None of the other Democratic candidates have suggested anything like an annual wealth tax.
In fact, the last presidential candidate with a legitimate wealth tax proposal was named Donald Trump. In 1999, when he was considering running on the Reform Party ticket, Trump endorsed a one-time 14.25 percent “net worth tax” for individuals and trusts worth over $10 million. According to Trump’s numbers, this would have generated $5.7 trillion, twice that of Warren’s proposal (though those numbers were disputed at the time) and enough to eliminate the national debt. Trump suggested using the savings from annual debt service payments to extend the solvency of the Social Security system (which doesn’t make a lot of sense, but this is Trump we’re talking about here).
Conservatives have suggested in the past that a wealth tax would decrease investment and economic growth, as the rich sell off assets to pay the tax. Of course, somebody else would have to buy those assets.
By itself, a wealth tax would begin to curb concentration of assets in U.S. society. The redistributive possibilities are also numerous. Sen. Cory Booker’s baby bonds proposal, to give every newborn a $1,000 low-risk savings account, with periodic additional payments that they can tap as adults, would cost an estimated $82 billion per year, less than one-third of the Warren plan. Sen. Sherrod Brown’s child allowance bill, a universal cash payout that would cut the child poverty rate in half, would cost about $108 billion a year, not even half of Warren’s proposal. Sen. Kamala Harris’s LIFT Act, a massive series of tax cuts for middle-class families, has a $2 trillion price tag over a decade, again less than the Warren wealth tax.
Another option suggested by Bruenig would be to place the revenues into a social wealth fund, an investment portfolio of stocks, bonds, and other assets for which every American would have a nontransferable share. This would reduce the concern that asset sell-offs from wealthy taxpayers would depress share prices, since the social wealth fund would effectively buy them back up.
A universal dividend from the growth of the assets in the social wealth fund portfolio would be distributed to Americans, not unlike the dividend given to Alaskans from revenues generated by oil wealth (known as the Alaska Permanent Fund). “This way, we snag the wealth and hold onto it permanently for the public,” said Bruenig.