The rich should get ready for Elizabeth Warren’s wealth tax
There are serious problems with the “wealth tax” on millionaires and billionaires that Sen. Elizabeth Warren says would raise nearly $3 trillion.
Since the tax would target wealth rather than income, the government would have to value the assets of wealthy households. Fudging and cheating would be rampant. There are also legal problems with a wealth tax, which may violate an arguably outdated clause in the U.S. Constitution.
Still, it could happen. Uncle Sam is running alarming, trillion-dollar deficits that at some point could necessitate large new sources of revenue. A wealth tax would do the trick. If Democrats take control of the government in the 2020 elections—including the Senate—they’ll need new funding sources for expensive new programs they plan to roll out. And Congress could probably write a law able to withstand court challenges to the constitutionality of a wealth tax.
But the strongest case for a wealth tax would come when the next recession strikes. America’s aristocrats have been doing great, enjoying the lion’s share of stock-market gains during an 11-year bull rally and capturing a record share of the nation’s overall wealth. The middle class, by contrast, has eked out modest gains, at best. Recessions always hurt lower-income workers the most, and the next one could generate unstoppable political pressure to rectify the growing gap between the rich and the rest.
Bulk of wealth comes from investments, business income
Warren’s wealth tax would impose an annual 2% surtax on wealth above $50 million, and a 3% surtax on wealth above $1 billion. There would be problems valuing the assets of the wealthy, which typically include privately owned business, real estate, art and other illiquid assets that don’t have an obvious market price. But Switzerland, Spain, France and Norway have figured out how to do it. Economists Emmanuel Saez and Gabriel Zucman of the University of California at Berkeley estimate this tax would raise $275 billion per year. Warren would use the money to cover a student debt payoff, free college for many students, universal child care and other new programs.
Simply raising the top income-tax rate might be a more straightforward way to raise revenue, and there are no questions about its legality. But Warren favors a wealth tax because the wealthy don’t actually earn all that much from ordinary labor at a job. Households with incomes above $53 million earned just 10% of that money from labor, according to research by Lily Batchelder and David Kamin of New York University School of Law. The other 90% comes from capital gains, dividends and business income. So most of that income is taxed under capital gains and business rates that are lower than taxes on income. Ordinary workers, by contrast, earn little of their income from investments taxed at the lower rates.