Senator Bernie Sanders: "We're gonna tell the wealthiest people in this country that they are gonna start
paying their fair share of taxes."
Alan D. Viard: Wealth taxes are in the news these days.
Senator Elizabeth Warren: "We need to put a tax on the top one-tenth of one percent.
The biggest fortunes in this country."
Alan D. Viard: Supporters see a wealth tax as a way to reduce inequality and reduce the
political power of the very wealthy. Opponents claim that a wealth tax would
face serious challenges. But what exactly is a wealth tax, and would it work for America?
First, let's talk about what a wealth tax is and what it isn't.
It's important to recognize that a wealth tax is not the same thing as an income tax.
Instead of being taxed on things like wages and interest, a wealth tax would
apply to assets that are owned, minus debts that are owed. As you've probably guessed,
the wealth tax would only apply to the very wealthy. In the November 2019
version of her plan, Elizabeth Warren proposed a tax of two percent per year
on wealth over $50 million and six percent per year on wealth in excess of $1 billion.
Bernie Sanders' plan begins with a rate of one percent per year for wealth
above $32 million and reaches 8 percent per year for wealth above $10 billion.
Now these numbers might seem low, but remember that the same stock of
wealth is taxed each year, and that adds up over time.
Let's put this in terms of income tax rates.
Imagine a taxpayer who holds a bond with a fixed interest rate of three percent per year.
A six percent per year wealth tax is equivalent to a 200% income tax
because the tax is double the taxpayer's interest income.
And don't forget that a wealth tax would be in addition to the income tax.
Now that we have a basic understanding of what a wealth tax is, let's try to predict
what would happen if America decided to adopt it. First, lobbyists would likely fight
for special tax breaks, exempting certain kinds of assets from the tax.
Asset exemptions would not only reduce the tax's revenue yield, but they would
encourage wealthy taxpayers to shift their wealth to the exempt assets.
We've seen that pattern occur in France and Germany, who have since repealed their wealth taxes.
Next, taxpayers and the IRS would have the burden of figuring out
what certain assets are worth. Now that's easy for bank accounts or stocks, but it's
far more complicated for many other things. How much would you say this house
is worth? This business? This yacht? Another possible side effect of a wealth tax
is the impact on businesses and workers. Reducing the savings of the
richest Americans reduces the funds available for business investments in
factories, equipment, and research. With less investment, workers would be less
productive and would earn lower wages, so workers could actually end up bearing a
small part of the wealth tax burden. To top things off, the wealth tax might be
struck down is unconstitutional. The Constitution requires that direct
federal taxes, other than income taxes, be divided among the states in proportion
to their population. Dividing the wealth tax in that way would probably not be doable.
Some legal scholars argue that the wealth tax is not subject to this
requirement because it's an indirect tax, but others disagree. Nobody knows how the
courts would rule. With a poor track record in Europe, the potential for
special tax breaks, administrative challenges, and the risk of being struck
down as unconstitutional, a wealth tax may not be the best strategy for taxing the rich.
It might make more sense to use other policies, such as reforms to the income tax
and the estate and gift taxes. But until then, we'll just have to ask ourselves "What if?"
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