US considers a tax on wealth, even as other nations back away

Why We Wrote This

Elizabeth Warren is considered a candidate of the left, yet even half of Republicans share her view that the wealthy should be taxed more. A key question: Is a tax on wealth rather than income the way to do it?

Stephane Mahe/Reuters
A sticker in December shows a portrait of French President Emmanuel Macron and the message "Reinstall the wealth tax," seen in a street during a national day of protest by the "yellow vests" movement.

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In an era of rising inequality, it’s not uncommon to hear proposals for the wealthy to pay higher income taxes. But Elizabeth Warren, the Democratic presidential aspirant and US senator from Massachusetts, recently proposed a different approach. Her plan would put an annual tax on the assets or wealth of the very rich rather than on the income produced by those assets – things like bonds or equity in a business.

Critics see a host of practical challenges. One is that the wealthy might move money offshore. That risk is a major reason many countries have moved away from wealth taxes.

“If you think it’s a war on plutocracy – you think that rich people have too much political power – then if these wealth taxes reduce the wealth of the very wealthy and reduce their political power, you’re satisfied, goal achieved,” says tax expert Joel Slemrod at the University of Michigan. “But if you’re thinking about this as a war on inequality [where] lower-income, lower-wealth people are not doing well, then you care about how much revenue you raise.”

When Sen. Elizabeth Warren (D) of Massachusetts proposed a wealth tax as part of her nascent presidential campaign, the idea immediately began drawing attention.

Most Americans back a wealth tax, new polls say. Economists are debating its pros and cons. There’s just one problem: It’s not clear it can fly.

There are constitutional challenges. Most of the developed world has moved away from wealth taxes because levies on wealth are harder to administer than those on income. And there’s a key question of motive: Do voters want to reduce inequality or the power of rich people over government? Or both?

“If you think it’s a war on plutocracy – you think that rich people have too much political power – then if these wealth taxes reduce the wealth of the very wealthy and reduce their political power, you’re satisfied, goal achieved,” says Joel Slemrod, director of the Office of Tax Policy Research at the University of Michigan in Ann Arbor. “But if you’re thinking about this as a war on inequality [where] lower-income, lower-wealth people are not doing well, then you care about how much revenue you raise.”

Senator Warren has espoused both goals, but from a practical standpoint it’s not clear which war her “ultramillionaire tax” is fighting.

In the United States, where income inequality has soared over the past three decades, wealth has become even more concentrated. During the 1980s, the top 1 percent of households owned 25 to 30 percent of the nation’s assets, according to Gabriel Zucman, an economist at the University of California, Berkeley. By 2016, they owned 40 percent of the assets.  

So placing a tax on wealth and not just income holds lots of appeal to economists and politicians eager to reduce inequality. Warren’s plan would place a 2 percent annual tax on the wealth of Americans with $50 million or more in assets and a 3 percent tax on those with $1 billion or more.

Michael Dwyer/AP
Sen. Elizabeth Warren (D) of Massachusetts speaks during a January organizing event at Manchester Community College in Manchester, N.H. She has proposed an annual 2 percent tax on the wealth of Americans with $50 million or more in assets.

Those rates sound low, but they are actually high, points out Alan Viard, a tax and budget policy expert at the American Enterprise Institute in Washington, D.C. For example, if someone owned bonds yielding 3 percent a year, then a 2 percent tax on the value of the bonds would amount to a 67 percent tax on the income from those bonds. A 3 percent wealth tax would wipe out all the income.

That’s before accounting for the effects of inflation or other taxes.

Denmark had a 2.2 percent levy on its wealthiest households – the highest rate of all the developed nations in the Organization for Economic Co-operation and Development (OECD) – until the late 1980s, when it cut the rate to 1 percent. In 1997, it abolished the tax completely, and the wealthy, especially the ultrarich, saw their wealth subsequently expand.

So if the goal is solely to reduce the wealth and power of the wealthy, then a 2 to 3 percent wealth tax might do the trick.

But capital is key to economic growth. People put their savings into savings accounts, stocks, or other financial instruments that create a pool of money that individuals and companies can use to fund business expansion or new ventures. Many economists warn that overly onerous taxes on capital would hurt growth.

For one thing, they could cause the wealthy to find loopholes to undervalue their wealth (especially hard-to-value assets like art), shelter their assets through legal loopholes, or even illegally hide their wealth by transferring it to offshore tax havens. In 2013, Professor Zucman estimated that 8 percent of the world’s household wealth was stashed offshore.

This risk of capital flight is a major reason many OECD countries have moved away from wealth taxes. In 1995, 14 nations taxed wealth; now there are four: Norway, Spain, Switzerland, and France. This year France replaced its wealth tax with a new wealth levy that specifically exempts financial assets.

A related complaint: Wealth taxes brought in less than expected. In Switzerland, for example, researchers found that for every 0.1 percentage point rise in the wealth tax, the amount of reported wealth went down by 3.5 percent. Other studies suggest this lowball reporting is less obvious in Sweden and Denmark, potentially because financial institutions in those countries report their customers’ holdings to the tax authorities; in Switzerland, they don’t, says Marius Brülhart, an economist at Switzerland's University of Lausanne.

In the United States, “we don't have an infrastructure for determining and monitoring taxable wealth,” says Professor Slemrod of the University of Michigan. “It’s not easy.”

Then there are constitutional objections unique to the US. The Constitution bans any national “direct” tax that is not apportioned according to state populations. A wealth tax was not considered a direct tax until 1895, when an anti-populist Supreme Court used the language to strike down an income tax and effectively block a national tax on wealth. In 1913, the 16th Amendment made it legal to collect income taxes regardless of population but didn’t address wealth taxes. How today’s court might rule if such a measure were passed is not clear, constitutional scholars say.

None of this means that Warren’s wealth tax is dead on arrival. Quite the opposite. A new Politico/Morning Consult poll found that 61 percent of Americans (including 50 percent of Republicans) support a tax on the very wealthy, with just 20 percent opposing it.

Economists behind the plan expect it will raise $2.75 trillion in a decade, enough to fund a much more robust Internal Revenue Service as well as Warren’s priorities on child care, reduced student debt, and climate policies. To avoid the problems that OECD nations faced, Warren’s plan calls for a broad wealth tax with few if any loopholes and a hefty exit tax if rich Americans decide to give up their citizenship to avoid taxes.

“You would see some people trying to hide assets abroad,” says Dr. Viard of the American Enterprise Institute. “We’ve gotten better at tracking the foreign bank accounts. But there are other ways of hiding assets overseas.”

Warren’s rivals for the Democratic presidential nomination have offered alternative ways to tax the wealthy. Sen. Bernie Sanders (I) of Vermont has proposed expanding the current estate tax, which also taxes wealth but only once: when it transfers to one’s heirs. And Rep. Alexandria Ocasio-Cortez (D) of New York has suggested a 70 percent income tax on people earning more than $10 million.

Given the rise of inequality at the top and prospects that it will continue, "there is a strong case to be made in the US and elsewhere for increasing the progressivity of taxation again," says Mr. Brülhart of the University of Lausanne. And not just through a wealth tax, he adds. "Probably the most reasonable way of doing it is a little bit of everything."

[Editor's note: This story was corrected to make clear that a small wealth tax could eliminate all the income from a bond portfolio and that the Supreme Court struck down a national income tax in 1895. The final paragraph was added after the story's initial publication.]

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