We’re going to discuss, rationally and without political vitriol, the shortcomings and virtues of the wealth tax proposed by presidential candidate Sen. Elizabeth Warren (D-Mass.). This critical evaluation will be rooted in what Warren’s campaign website calls the “Ultra-Millionaire Tax.” Our assessment is not favorable, but unlike many who denigrate the plan, we actually read it. If you’re to get the full benefit of this discourse, you should too.
Here it is. We’ll wait.
Now that you’re caught up, let’s take an informed look at Warren’s wealth tax proposal.
What’s wrong with Warren’s plan
Warren’s proposal – similar ones have been proffered by some of her rivals in the Democratic primaries – is essentially a surcharge on the households she considers to be excessively wealthy, those with more than $50 million free and clear. There would be a 2% levy against every dollar over that threshold, plus another 1% for every dollar over $1 billion.
But how do you place an incontestable value on a household’s net worth? Forbes tries this every year, and every year Forbes gets it wrong.
“The value of assets such as stocks, bonds, and real estate are pretty easy to measure,” Veronique de Rugy writes in the conservative commentary magazine National Review. “But many other assets — such as cryptocurrencies, trusts, and private businesses — are harder to assess.”
When wealth taxes were first proposed in the 19th century, that would have been the opportunity to switch to this revenue model because there was really only one measure of a family’s affluence back then: the land it owned. A wealth tax might’ve worked at that time, because real estate is far less fungible than today’s capital; it’s hard to move a farm to the Caymans. The single-tax plan first proposed by American economist Henry George and endorsed by Milton Friedman as “the least bad tax.”
The good thing about a wealth tax is that it’s supposed to eliminate income tax – and sales tax for that matter. If a government is going to tax anybody’s net worth, it ought to tax everybody’s for consistency’s sake, then let them keep their entire paychecks. Warren’s plan is simply a tack-on for the most fortunate. Expect a run on Ayn Rand books if that happens.
And, if one’s stated goal is to “take money out of politics,” relying on 75,000 families to pony up another $2.75 trillion over ten years is a funny way of doing it. You know the saying, “Owe the bank a thousand dollars, and the bank owns you. Owe the bank a million dollars, and you own the bank.” If Warren thinks those families exercise too much control over the government now, wait until this plan is passed.
Lastly, you might have heard this about wealth taxes: They’re next to impossible to implement in practice. That is mostly true. While some prosperous countries persist in taxing net worth – Belgium, Italy, the Netherlands, Norway, Spain and Switzerland – most countries that have tried it have either dialed it back to a real estate-only tax or abandoned it entirely. So if Warren manages to ram this through, history tells us that the odds are slim it would survive the planned 10 years to collect the whole $2.75 trillion.
What isn’t wrong with Warren’s plan
Our criticism falls in line with conventional conservative reasoning. You may have noticed, though, a single glaring omission. “Redistribution of wealth” is one of those things that pundits on the right expect us all to recognize as a bad thing and requires no further examination because … it’s bad.
And yet, here is where the Warren campaign scores a fair point. The case can be made that, under the proper conditions, wealth redistribution would be healthy for a society. They would also argue that those are the conditions on the ground today.
“[T]he richest top 0.1% has seen its share of American wealth nearly triple from 7% to 20% between the late 1970s and 2016, while the bottom 90% has seen its share of wealth decline from 35% to 25% in that same period,” according to the campaign website, citing the work of Berkeley economists Emmanuel Saez and Gabriel Zucman. “Put another way, the richest 130,000 families in America now hold nearly as much wealth as the bottom 117 million families combined.” [Bolded in the original.]
So wealth has already been redistributed, it’s just that it has accrued to our nation’s most wealthy. This was the main thrust of Thomas Piketty’s 2013 bestseller Capital in the 21st Century.
In the days before and since the Great Recession, any number of reasons – growing income gaps between corporate offices and the production line, technological advancements, shifting of in-demand skills, modifications of tax treatment, expansionary monetary policy penalizing savers, new immigration patterns, changes in cultural norms – contributed to the greater concentration of wealth. It’s anyone’s guess, though, which are more impactful than others. Still, the wealth gap got even wider due to the erasure of a huge swath of middle-class wealth which resulted from the housing market collapse of 2007-2009.
Warren’s followers argue that a millionaires’ tax is a reasonable remedy. It might be inelegant, but so was the Troubled Asset Relief Program which bailed out the banks while allowing them to function as private entities rather than as a nationalized industry. (It could’ve just as easily gone: “Here’s your $45 billion, Citigroup. Now meet your new board chairman, Barney Frank.”)
So why should the wealth gap matter? There will always be families who are richer than others. There will always be individuals who are more talented and who strive harder than others and deserve to be rewarded economically. Even if opportunity were equal – and it isn’t – outcomes would never be. This is neither an American nor a present-day phenomenon.
So let’s get to the point and answer the question we just posed: Excessive concentration of wealth matters because, left unchecked, it’s dangerous – to the economy, the society, and even the government as it has been constituted since 1788. There are scores of studies supporting this assertion, but the one that puts it in the starkest terms comes from the University of Maryland. It suggests economic stratification over time turns elites into “predators” – for mathematical modeling purposes – and commoners into “prey,” essentially just another natural resource. And, just as any natural resource can be depleted, so can the population at large. The study found that this dynamic led to the collapse of such massive polities as the Roman, Han and Gupta empires.
There’s a separate mathematical model for describing wealth distribution. It’s called a Gini coefficient, and it measures on a scale of 0.000 to 1.000 how concentrated wealth is in a country. A 2008 National Bureau of Economic Research paper notes that the U.S. was among the most highly wealth-concentrated countries on earth even before the recession. So were Switzerland, which one might expect, and Denmark, the purported democratic-socialist utopia. (Income inequality is what Danish public policy solved for, and that’s different from wealth distribution.) But the rest of the Top 10 were Namibia, Zimbabwe, Gabon, Central African Republic, Eswatini (formerly Swaziland), Guatemala, and Chile. Honeymoon destinations tended to be at the other end of the list.
An eye on income tax
Net-net, the wealth tax is not likely to affect you one way or the other even if by some supernatural intervention, Warren gets it through Congress and the courts. So that’s not what should be keeping us up at night.
Buried in Warren’s proposal, though, is one other item – practically a throwaway line.
“[T]he families in the top 0.1% are projected to owe 3.2% of their wealth in federal, state, and local taxes this year, while the bottom 99% are projected to owe 7.2%,” according to the website. [Again, bolded in the original.] “While we must make income taxes more progressive, that alone won’t straighten out our slanted tax code or our lopsided economy.”
In there, we have evidence of a Plan B from a campaign that realizes it has no shot at all of accomplishing Plan A. The implication of “more progressive” is that the more money you make, the higher your marginal tax rate. Even if we don’t really have to sweat a wealth tax, it’s important to recognize that the alternative could well be old-fashioned bracket creep.
That likelihood might be reason enough to consult a financial professional.