Elizabeth Warren recently unveiled a plan to impose a 2% tax on households with net assets worth more than $50 million and a 3% tax on households with assets worth more than $1 billion. Her economic advisors estimate this tax would affect about 75,000 households and raise $2.75 trillion over ten years. Revenue generated by the wealth tax would go towards programs to reduce inequality.
Numerous commentators have noted that wealth taxes have fallen out of favor over the last few decades. Austria, Denmark, Germany, Finland, Luxembourg, and Sweden have all abolished their wealth tax since 1990. The main reason is that the tax was hard to administer and failed to generate much money. As a recent OECD report put it:
“Decisions to repeal net wealth taxes have often been justified by efficiency and administrative concerns and by the observation that net wealth taxes have frequently failed to meet their redistributive goals. The revenues collected from net wealth taxes have also, with a few exceptions, been very low.” The Role and Design of Net Wealth Taxes in the OECD, OECD Tax Policy Studies, 2018
Some assets are inherently difficult to evaluate. Close to half the wealth owned by the very rich is in private business equity, as in buildings, accounts receivables, machinery, patents, inventory, etc. The value of these assets fluctuates daily and it is impossible to know what they’re worth until they’re sold. Actually most of the holdings of the very rich are in non-financial items that can only be monetized when they are sold. Hence the administrative headache. This chart illustrates the problem:
Another problem with a wealth tax is that, designed poorly, it is bad for the economy. Which ultimately means less tax revenue. Which defeats the whole purpose. Do we really want the very rich to sell their property, business assets, and stocks to pay a tax? How would that impact capital investments and economic growth? Do we want the very rich to sell a lot of stocks to pay their wealth tax? Before you say, “Yes!”, think on this: pension funds own more in stocks than individual investors and, according to the Fed, roughly half of Americans own stocks, directly and indirectly.
None of this means I’m against a wealth tax on principle. But a wealth tax has to be well designed so that the goose remains in robust health, the better to lay all those golden eggs. If the US were to have a wealth tax, the OECD offers some reasonable guidelines:
Keep wealth tax rates low, especially if they’re on top of capital gains taxes
Exempt business assets
Exempt personal and household effects up to a certain value
Allow payments in installments for taxpayers facing liquidity constraints;
Regularly evaluate the effects of the wealth tax
Unfortunately, I’ve seen nothing in Elizabeth Warren’s wealth tax plan to indicate she’s given much thought to these considerations.
References:
OECD (2018), The Role and Design of Net Wealth Taxes in the OECD, OECD Tax Policy Studies, No. 26, OECD Publishing, Paris, https://doi.org/10.1787/9789264290303-en.
Wolff, E. N. (2016). "Household Wealth Trends in the United States, 1962 to 2013: What Happened over the Great Recession?" RSF 2(6): 24-43. https://www.rsfjournal.org/doi/pdf/10.7758/RSF.2016.2.6.02