It Depends on the Objective

At Bloomberg Ferdinando Giugliano casts some rain on the wealth tax parade. In reporting on the results of a conference whose attendees include Saez, Zucman, Lawrence Summers, and Greg Mankiw, he writes:

Overall, Saez and Zucman failed to make a convincing case for their proposal. Their eye-catching claim that the very richest now pay less tax as a proportion of their income than the poor is based on highly dubious assumptions. A wealth tax also suffers from a string of substantial practical and theoretical problems not shared by other ideas to reduce inequality, such as raising capital gains taxes or closing estate-tax loopholes. As Summers put it during the debate: “For progressives, to use their energy on a proposal that has a more than 50% chance of being struck down by the Supreme Court, little chance of passing through Congress and whose revenue-raising potential is very much in doubt, is to potentially sacrifice immense opportunities.”

The problem with the analysis offered by the Berkeley economists starts with their stunning finding that was recently advertised in a widely-shared column in the New York Times. Saez and Zucman claim that in 2018, the top 400 earners faced a lower effective tax rate, measured as a share of pre-tax income, than everyone else. This finding is only based on an estimate, since the actual data for 2018 are not yet available. Moreover, as noted by Wojciech Kopczuk, an economist at Columbia University, the result hinges on making some extreme assumptions on the incidence of taxation and the measurement of pre-tax income. As Kopczuk noted, their calculation is presented as a “fact” when it is not.

Of course, one can still believe that the rich should pay much higher taxes regardless of what exactly happened to their tax rate. Any policy-maker can legitimately prefer greater redistribution. The tax burden in the U.S. is significantly lower than in most other OECD countries. There is a good case to be made that the U.S. should increase revenues and spend more on education and infrastructure. The question, however, is which taxes are best suited for this aim.

Zucman believes that wealth taxes have several advantages. They allow one to overcome what he identified as the “Warren Buffet problem”, after the billionaire founder of Berkshire Hathaway, who once famously said he pays a lower tax rate than his secretary. Buffett’s annual income flows mainly from him selling a small proportion of his shares, on which he pays a capital gains tax. Capital gains taxes don’t take into account the enormousness of Buffett’s wealth, which would be taxed under Sanders’s and Warren’s plans. Moreover, unlike an estate tax, a wealth tax allows the state to obtain revenue immediately, rather than waiting until the death of a billionaire. Saez and Zucman believe that Warren’s plan — which would tax fortunes over $50 million at 2% annually, and those over $1 billion at 3% — would raise $2.75 trillion over the course of 10 years.

However, there are reasons to be skeptical of this number. For starters, you would expect billionaires to make different choices when faced with a wealth tax. They could donate much of their money to a charity, for example, or decide to spend more of it; a wealth tax could then end up encouraging lavish consumption. Mankiw outlined the paradox that a wealth tax would spare a wasteful top manager who spends all his income annually, while hitting a frugal one who saves a lot and perhaps invests in successful start-ups. Finally, a wealth tax is a form of double taxation, because the money was often taxed when it was earned, and because it would recur every year. (An estate tax, sometimes also called a form of double taxation, is at least levied only once.) As such, one wonders to what extent it is as fair as its proponents suggest.

There are also important practical problems: Billionaires’ wealth often stems from private companies. Private valuations of unlisted companies can often be spectacularly wrong. Zucman suggested that billionaire owners of private firms should be given the option of paying the wealth tax based on an estimated value or payment of shares. But the idea that the state would over time acquire significant holdings of some private companies is also problematic, as it would amount to — at least temporary and partial — nationalization.

Whether or not a wealth tax is a good idea or not depends somewhat on your objectives. If your objective is greater income and wealth equality, it’s not that great an idea. If your objective is class warfare or undermining the U. S. economy, it’s an excellent idea.

This seems like a good time for me to repeat my not particularly helpful suggestion that if you want greater income and wealth economy you should identify all the things that have been done since 1970 and do the opposite or, at least, change them so they push things more in the direction you’d like to see.

Immigration and free trade have been a bust as far as income equality is concerned, particularly the attempt at integrating China into the world economy (it’s been even worse for the environment). So have changing the rules to provide incentives for companies to provide compensation to their top management in the form of stock options and subsidizing the rich. Subsidies for the rich take all sorts of forms, from the forms of investment to which capital gains taxes apply to the home mortgage income tax deduction.