Senator Elizabeth Warren (D-MA) aims to contain spiraling inequality in the United States and make the rich pay, according to a report by Jeff Stein and Christopher Ingraham of the Washington Post.
They report that UC Berkeley economists Emmanuel Saez and Gabriel Zucman are working with the presidential candidate on a proposal to impose a property tax on Americans with assets over $ 50 million.
Most Americans currently pay property taxes to their local government, a form of property tax. Most of the middle class assets are owned. Of course, wealthy people own real estate, but they mostly own stocks and other financial assets that are largely beyond taxation. The French economist Thomas Piketty put wealth taxes back on the intellectual agenda with his influential book from 2014 Capital in the 21st Century. The issue of runaway inequality has been discussed by many Democrats in recent years, but Warren is the first politician to actually adopt Piketty’s proposed solution.
It is no coincidence that Saez and Zucman are former Piketty associates who have carried out their own influential research on the interplay between tax policy and extreme inequality. The basic plan is to impose a 2 percent tax on assets greater than $ 50 million and a 3 percent tax on assets greater than $ 1 billion. According to the Post, Saez estimates the tax would hit approximately 75,000 families and raise $ 2.75 trillion over 10 years.
Property taxes, explained
Most taxes affect a cash flow that takes X% of your income or adds Y% to the cost of purchase. Instead, a wealth tax hits a stock.
Facebook boss Mark Zuckerberg is worth around $ 57 billion. A 3 percent tax on this wealth would cost $ 1.7 billion in the first year and, if applied year after year, could tax its wealth close to $ 0 for decades if the wealth does not result in investment gains.
Warren’s proposal naturally provides for a progressive wealth tax where the 2 percent rate does not apply to the first 50 million. However, application of the tax would have a dramatic pull on large fortunes and would tend to push them up to the tax threshold.
This is especially true because the very existence of the wealth tax would encourage wealthy individuals to waste their wealth on charitable giving and lavish consumption. If you’re trying to amass wealth the government will tax it, so you might as well spend it.
Again, this is precisely the standard economic argument against wealth taxes. In a very simple, pared-down view, the accumulation of capital (buildings, machines, office equipment, etc.) leads to higher wages and living standards. A wealth tax, by preventing the accumulation of financial capital, could also prevent the accumulation of physical capital and thus lead to lower wages and living standards.
Most agree that a simplistic two-factor model of how the economy works is incorrect, but how remotely attractive a property tax is depends on whether you think it’s a decent approximation the real world or some wild fantasy acts prepared to serve the self-interest of the plutocrats.
More prose is the practical experience that it is difficult in practice to tax financial assets. Property tax works because you can’t actually move your home to the Cayman Islands. But you can definitely move your stock portfolio to a Cayman Islands registered mailbox company. Zucman is the author of a 2015 book on tax evasion. The hidden riches of the nations, so he is well aware of the problems of tax avoidance. The plan includes a number of anti-tax avoidance measures, including a heavy increase in IRS funding and mandatory audits, according to the Post.
Back to future tax policy
A recent OECD report found that although wealth taxes were once common in developed countries, they have gone out of style in recent years.
While twelve OECD members had levied wealth taxes in 1990, there are only four today – France, Norway, Spain and Switzerland. Warren’s suggested rate would be slightly lower than Spain’s but higher than the other three. The OECD report notes that the decline in wealth taxes is due both to “administrative concerns and the observation that often net wealth taxes have not met their redistributive targets”.
In other words, the rich not only like to pay wealth taxes, they also find countries difficult to get them to do.
More generally, the general trend in tax policy over the past few decades has been for countries to compete to become investor-friendly with lower marginal income tax rates, lower corporate tax rates, and the abolition of wealth taxes. The general idea was that while such policies could increase inequality, by attracting investment it would ultimately stimulate economic growth and make everyone better off.
In practice, economic growth rates in industrialized countries have slowed while inequality has increased. That doesn’t prove the tax policy changes were a mistake – perhaps without them growth would have slowed even more. But in the course of the Great Recession, the observation that the promised growth boom failed to materialize aroused growing intellectual interest in rethinking. Warren’s proposal – like MP Alexandria Ocasio-Cortez von Saez’s call for a top tax rate of 70 percent – is a sign that the intellectual backlash is now entering the realm of practical politics.