Plans to tax wealth would reshape economy

Sen. Elizabeth Warren (D-Mass.), a Democratic presidential hopeful, during a campaign stop at at Clinton College in Rock Hill, S.C., Sept. 28. Travis Dove/The New York Times

WASHINGTON — Progressive Democrats are advocating the most drastic shift in tax policy in over a century as they look to redistribute wealth and chip away at the economic power of the superrich with new taxes that could fundamentally reshape the U.S. economy.

As they compete for the Democratic presidential nomination, Sens. Elizabeth Warren of Massachusetts and Bernie Sanders of Vermont have proposed wealth taxes that would shrink the fortunes of the richest Americans. Their plans envision an enormous transfer of money from the wealthy to ordinary people, with revenue from the wealth tax used to finance new social programs like tuition-free college, universal child care and “Medicare for All.”

The wealth taxes under discussion would deal a major blow to the balance sheets of American plutocrats like Jeff Bezos, Bill Gates and Warren Buffett. If the tax that Warren has called for had been in place since 1982, the net worth of the 15 richest Americans in 2018 would have been half as much, according to two economists who helped develop her plan. The Sanders wealth tax, which was released last week, would have eroded their fortunes even further, to barely one-fifth of their 2018 total.

The idea of a wealth tax has become an animating issue for the Democratic Party, which sees it as a solution to long-festering concerns about inequality and the rapid concentration of economic power among wealthy Americans. Its emergence is also an antidote to the policies of President Donald Trump, whose $1.5 trillion tax cut largely benefited rich Americans and corporations while leaving future generations with the bill.

“We are living in the second Gilded Age,” said Bruce Ackerman, a professor of law and political science at Yale University, referring to the stark wealth gap produced by the Industrial Revolution. “What we have once again is people both on the right and the left being provoked by the perception they are being left behind.”

But the idea of redistributing wealth by targeting billionaires is stirring fierce debates at the highest ranks of academia and business, with opponents arguing it would cripple economic growth, sap the motivation of entrepreneurs who aspire to be multimillionaires and set off a search for loopholes.

“You’re going to completely disincentivize capital investment, which is going to be very, very bad for economic growth,” Treasury Secretary Steven Mnuchin said in September. “Taxing capital is not a good thing for creating economic growth, and if anything we should be looking at how we create more incentives for economic growth.”

Income inequality has surged in the United States in the last 50 years, with the top 0.1% now controlling about a fifth of the nation’s wealth. That concentration of wealth has coincided with stagnant wages, rising college costs and the lingering effects of the Great Recession, which erased trillions of dollars in household wealth, ravaging the middle class. New figures from the Census Bureau released last week show that income inequality in the United States reached its highest level last year since the government began tracking it in 1967.

The dueling policy proposals from Warren and Sanders come as they compete intensely for support among the same universe of liberal voters and activists. Their tax proposals are seen as critical to galvanizing and building support on the left, but their ideas will also provide fodder for Republicans eager to paint them in a general election as tax-happy and too far to the left.

On the campaign trail, Warren explains the concept of a wealth tax by putting it in familiar terms, likening it to the property taxes that many Americans pay on their homes. For the superrich, she said in South Carolina on Saturday, “how about we include in yours not only your real estate, but also your stock portfolio, the diamonds, the Rembrandt and the yacht?”

Sanders is blunt about his desire to reduce the size of America’s biggest fortunes, even highlighting how much individual billionaires would have to pay in taxes under his proposal. He said last week that he did not believe billionaires should exist in the United States.

“There’s no question to my mind that the United States is moving toward an oligarchy,” Sanders said. “This is an issue that has to be addressed, and this wealth tax begins to do that.”

The United States largely taxes individuals based on the income they earn through their jobs and investments. Wealth taxes impose annual levies on an individual’s accumulated assets, everything from vacation homes and art collections to stakes in companies and family heirlooms.

The tax proposed by Warren would apply to households worth over $50 million. She would impose a 2% tax on net worth above $50 million, and a 3% tax on net worth above $1 billion.

The plan from Sanders would apply to a larger number of households, and it would be particularly aggressive on billionaires. His tax would start out at 1% on net worth from $32 million to $50 million, and it would top out at 8% on net worth over $10 billion.

Emmanuel Saez and Gabriel Zucman, the two University of California, Berkeley, economists who helped Warren and Sanders develop their plans, project that Warren’s proposal would hit about 70,000 households and generate $2.6 trillion in revenue for the federal government over a decade. They project that Sanders’ proposal would apply to 180,000 households and raise $4.35 trillion over 10 years.

Zucman said he believes a wealth tax would have a modest but positive impact on growth. By reducing the power of the wealthiest, he argued, it would make markets more competitive and spur innovation.

But redirecting such vast sums could have unintended effects on the U.S. economy that go beyond promulgating economic fairness. While Warren ticks off the social programs that can be funded if the richest Americans pay just 2 cents on every dollar they have above $50 million — a number that is unimaginable to most Americans — skeptics warn of economic stagnation, depressed business confidence and a legal battle that would go to the Supreme Court.

At a conference sponsored by the Brookings Institution in September, N. Gregory Mankiw, a Harvard University economist, debated Saez and Zucman about the merits of taxing wealth. Mankiw, the former head of President George W. Bush’s Council of Economic Advisers, offered a searing critique, arguing that a wealth tax would skew incentives that could alter when the superrich make investments, how they give to charity and even potentially spur a wave of divorces for tax purposes. He also noted that billionaires, with their legions of lawyers and accountants, have proved to be experts at gaming the system to avoid even the most onerous taxes.

“On the one hand it’s a bad policy and then the other thing is it’s a feckless policy,” Mankiw said.

Left-leaning economists have expressed their own doubts about a wealth tax. This year, Lawrence Summers, who was President Bill Clinton’s Treasury secretary, warned in an article with Natasha Sarin, a law professor at the University of Pennsylvania, that wealth taxes would sap innovation by putting new burdens on entrepreneurial businesses while they are starting up. In their view, a country with more millionaires is a sign of economic vibrancy.

“Turning the tax code into a vehicle for confronting what some call ‘oligarchic drift’ would undermine business confidence, reduce investment, degrade economic efficiency and punish success in ways unlikely to be good for the country or even to be appealing to most Americans,” they wrote.

Corporate America has also come out against a wealth tax. At a recent briefing by the Business Roundtable, a lobbying group for large companies, Jamie Dimon, chief executive of JPMorgan Chase, said he feared that the federal government would squander the additional revenue.

“I know a lot of wealthy people who would be happy to pay more in taxes; they just think it’ll be wasted and be given to interest groups and stuff like that,” Dimon said.

Other obstacles that often raise concern about wealth taxes are how to value assets like art and private businesses when determining wealth, and the potential impact on stock markets if rich shareholders suddenly have to liquidate their holdings to pay their tax bills.

Despite the many obstacles, a wealth tax in the United States could prove to be a political winner for Democrats and serve as a rejoinder to Trump, who has allowed deficits to swell by cutting taxes without curbing spending.

Warren makes a point of stressing she is not looking to punish the rich, and she presents the tax as quite modest: just 2 cents on every dollar over $50 million in net worth. That 2-cent tax — which rises to 3 cents on net worth over $1 billion — amounts to a golden key that unlocks other policy plans, covering the cost of proposals like student debt cancellation, free public college and universal child care.

Warren’s White House bid is the rare political campaign where a tax rate has become a catchy slogan: Crowds have broken out into chants of “2 cents!” and at a recent political event in Iowa, two of her campaign staffers dressed up as pennies.

“I think that what she does really brilliantly is takes a policy that’s really cumbersome and makes it really simple and straightforward,” Victoria Farris, 38, said after Warren gave a speech in New York in September. “You don’t have to be an economist, you don’t have to have an advanced degree — 2 cents is 2 cents.”

New York Times

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