I have said before that the reason (singular) that Ted Kennedy was in the Senate was to prevent a wealth tax from being brought up. Presumably, some found that cryptic. Now I have a bit of corroborrating evidence for my claim. Massachusetts Sen. Elizabeth Warren, who presently holds the seat previously occupied by the late Sen. Kennedy, has broached the subject of a wealth tax. From Jared Bernstein in the Washington Post:
Sen. Elizabeth Warren (D-Mass.) has just introduced a tax idea this country desperately needs: a tax on high-end wealth. It’s an idea that’s well-crafted for our time, one that promises to add fairness to an unfair tax code, raise significant, much-needed revenue and push back on the historically high level of wealth concentration in the United States.
Here’s the plan, which, for the record, is extremely simple to explain, an advantage when it comes to tax policy: Wealth over $50 million would be taxed at 2 percent; wealth over $1 billion would face an extra 1 percent tax. “Wealth†is defined as net worth — the value of assets minus any debts.
That’s it. It is projected that the tax would raise about $2.75 trillion in revenue over 10 years. To get a sense of that magnitude, recall that the Trump tax cuts lost less revenue (just under $2 trillion) than this tax allegedly gains. That’s a lot of tax progressivity pushing back on the highly regressive Trump cuts.
I’m skeptical of the justification for a wealth tax and I question the constitutionality of a wealth tax. The U. S. Constitution empowers the Congress to levy fees and what amount to head taxes but there is a substantial body of legal opinion over the course of the 19th century that suggests that a wealth tax would be unconstitutional. The 16th Amendment legalized a federal income tax but was limited to taxing income.
I’ll make the following predictions about a wealth tax in the U. S. if such a thing is ever enacted into law:
- It would not be limited to the ultra-wealthy or at least would not remain so. The federal income tax was initially limited to the wealthy. It did not remain so for long.
- The revenue resulting from a wealth tax would do little to ameliorate income inequality. It would end up being a massive transfer from the wealthy to the merely well-to-do.
- It would decrease economic growth.
- It would increase deadweight loss.
My preferences would be to remove the subsidies available to the ultra-wealthy or reinstitute the inheritance tax, curtailing the use of trusts for purposes of intergenerational transfer.
The work of Galbraith and Piketty indicate a wealth tax is the only method of keeping the wealthy from acquiring all assets, at least in a capitalist economy.
Actually, we can go back to the Sumerians and Babylonians for confirmation of this. Their records show they were very much aware of the dynamics of compound interest and continuously struggled to contain the rentier class.
Wow, I read the piece and it’s even more stupid and problematic than you indicate:
– He claims it would cover all assets, but dodges how values would be calculated and the methods needed to fairly determine wealth. In other words, it’s not simple at all. The details matter and they will be very complicated.
– Relatedly, the wealth calculations and thus the resulting revenue he cites seem to be based on modeled expected values from a single paper.
-It’s self-contradictory – he argues a wealth tax is needed to combat wealth inequality (“regulating inequality in a market economy” and “safeguarding democracy against oligarchy”) then turns around and says the effects of the tax will be negligible because it’s so small. And then he does another 180 and says this it is necessary because “wealth begets power” and because the present tax system is “rigged.”
I would only re-emphasize that an enormous amount of present policy consists of subsidies for the well-to-do. Transfers from the very rich to the only slightly less rich does practically nothing to change wealth inequality.
The single most effective way to reduce income and wealth inequality in the United States is to restrict the number of low skill immigrants coming into the country. In the absence of such restriction I see no way of reducing income and wealth inequality. Just do the math.
I am somewhat relaxed about a “wealth taxâ€. We already have two forms of it, the inheritance tax and the property tax. How is a wealth tax different from those two taxes combined?
It’s actually an interesting exercise to think through it.
Like what’s “taxable wealthâ€; would it include real estate. How would one value non-liquid assets?
Who is taxable? A lot of wealth these days is controlled by trusts, foundations
Municipal governments derive a significant amount of income from property tax – a federal wealth tax would decrease their income, how would the Federal government compensate?
It brings a chuckle to see, in one post, Ben derisively comment on the notion of “professionals in good standing” and then turn around and quote Piketty or Galbraith – of course they do “work.” (Not to even mention what appears to be a defense of AOC. Now that’s comedy.)
In any event, there are the very rich and the very poor in all political systems. The shared attribute in all those systems is the use of authority and political power to benefit the very rich and keep down the very poor. There may be any number of ways to address income inequality, but a major issue of the day – immigration – is perhaps the most robust. Yet the party, with a fresh infusion of more socialist leaners, that claims to care about income inequality is fighting with all it can muster any attempt to reduce the problem. Talk about hypocritical.
” We already have two forms of it, the inheritance tax and the property tax. How is a wealth tax different from those two taxes combined?”
A wealth tax reduces rents over the course of the asset’s existence. It slows the rate of accumulation by the tippy-top.
Drew, Galbraith and Piketty used two different data sets and two different methodologies and got similar results. And their data are publicly available.
Not to mention pension plans.
Property tax is collected every year (reducing the net yield as Ben suggested), and that is the biggest asset for most people.
Extending it to non real estate assets is more like a tax reform. Not really going to bring us closer to socialism.
Other interesting questions are
1) how it would change the valuations for assets that don’t produce a regular income stream
2) how it interacts with retirement savings accounts
“My preferences would be to remove the subsidies available to the ultra-wealthy or reinstitute the inheritance tax, curtailing the use of trusts for purposes of intergenerational transfer.”
Why would you be able to institute these, which the wealthy will clearly oppose, but not increase their taxes? My bet is that we wouldn’t be too successful at your preferred options. Maybe we get an ineffectual inheritance tax back in place, but doubt it.
Steve
There are two distinct issues: the political possibility of a tax and its efficiency. Reducing subsidies will reduce deadweight loss; increasing taxes and redistributing the revenue will increase it.
Do you really think that increasing taxes will be politically easier than reducing subsidies?
“Why would you be able to institute these, which the wealthy will clearly oppose, but not increase their taxes? My bet is that we wouldn’t be too successful at your preferred options.”
Effective tax rates for the wealthy have been essentially unchanged for 40 years. “Increase their taxes” usually means increasing marginal rates which we know is only tenuously linked to effective rates.
And our present inequality is not the result of tax policy and therefore tax policy cannot (by itself certainly) fix it.