by Jessica Chang
Elizabeth Warren may have dropped out of the Democratic primaries in March, but that doesn’t mean her policies are out of the running. Joe Biden, the all-but guaranteed Democratic nominee, has adopted many of the left-wing policies of both Warren and Bernie Sanders, including a bankruptcy reform act and lowering of the Medicare cut-off age. But there’s one policy that Biden has not picked up – Warren’s wealth tax. Although many pundits speculate that supporting the wealth tax could help define Biden against billionaire Trump, it’s almost an unwritten golden rule of politics: never raise taxes.
When it comes to taxes, the waters quickly get muddy and contaminated with political prejudice. In this two-part series, I will present the facts – just the facts – on both sides of the debate.
Part 1: Why a wealth tax is good
First, let’s understand what the wealth tax is. Warren proposes a wealth tax of 2% on net worth about $50 million, and an additional 6% tax on net worth about $1 billion. A wealth tax is not the same as an income tax – an income tax is on the amount of money you earn in a set period, while a wealth tax targets your assets. This leads us to our first point on the possible benefits of a wealth tax.
- It’s more effective than the income tax at reducing wealth inequality.
Most millionaires and billionaires don’t make their money by earning wages – this means that income taxes are ineffective at closing the gap between wealthy and middle-class households. Instead, wealthy households derive most of their wealth from assets that return value – like stocks. And if you hold a stock for more than a year, it’s not taxed as income. Instead, it’s taxed as capital gains, which is a much lower rate.
All of this is a long way of saying that rich people don’t pay the same rate of income tax, meaning that wealth inequality keeps growing. In fact, according to the Brookings Institution, middle class household net worths have grown by 7% since 1995. In the same time, the top 1% of households have grown by 187%.
This is where a wealth tax comes in – it gets at wealth that was previously untaxed. Crucially, this tax isn’t meant to reduce the amount of wealth that households have. Instead, the Mercatus Center from George Mason University showed in February 2019 that the tax would merely slow the growth of rich households (multi-millionaires) to growth on par with the average American household.
- It could lead to economic growth.
So once we tax everyone, how much money do we end up with? According Saez and Zucman from the National Bureau of Economic Research in 2014, we could raise up to $2.75 trillion over 10 years. What do we do with this money?
Depending on how the government invests this money, and depending on which economic theory you buy into (the famous quote about economists: “they don’t actually know anything”), the economy could actually grow. The main argument on the other side of the tracks is side-supply, or trickle-down growth, which I’ll get into in the second part of this series.
If, however, you buy into consumer theory, the economy will expand under a wealth tax IF the government re-invests in the middle class. Basically, consumer theory says that if average/middle income households have more money, they’ll buy more goods and services, which grows the economy. Since the middle class is the backbone of the economy, any investment using the revenue generated from the tax that is used to stimulate this bracket would theoretically be highly beneficial. A 2012 analysis by the Center for American Progress reveals that when we implemented a wealth tax in the 1990s, middle class household net worth grew by twice the rate that they did in the 1980s and 2000s, when there was no such tax. An example of productive investment by the government comes from the American Society for Civil Engineers, which estimates that if we invest just half the revenue from the tax in our infrastructure, we’ll save a net $4 trillion due to boosted productivity. Other investments that could grow our economy include education, clean energy, and reducing our national deficit – something we all benefit from.
Now, let’s talk about whether or not a wealth tax is actually possible. One of the biggest arguments against the wealth tax is that it is impossible to reinforce – wealthy individuals can hide their valuable paintings and jewels, or store cash in offshore accounts. There are several reasons why this problem isn’t actually as big as it seems:
Saez and Zucman’s 2014 estimate is conservative – they took these concerns in mind. The truth is that most wealth isn’t jewels or yachts – 80% of it is in publicly held stocks, bonds, and real estate that return value. This means that it’s very difficult to evade the tax, because
- It’s hard to hide publicly held assets.
- You can’t move these assets overseas, because they need to be in the US to return value. Also, the plan includes a 40% exit tax, meaning if you give up US citizenship to escape the tax, you’ll have to give up 40% of your wealth.
- Yes, the IRS is known for its ineffective bureaucracy, but revenue from the tax will probably also go to funding the agency so it’s able to collect revenue.
Of course, as many studies and sources as I cited in this piece, there are equally as many studies and sources that support the opposite side. So, I’ll be back next week with the second part of this series, which explains the downsides of a wealth tax.