Wealth tax on super-rich in US

Benjamin Franklin once said nothing is certain in this world except death and taxes and it looks like 2020 will be about at least one of those. In January 2019, Senator Elizabeth Warren proposed something called a "Wealth tax." Most of the taxes we pay only happen when money changes hands, when we earn money or when we spend. But according to Warren, here's the problem with that. "Two people who may have the same income, but are in wildly different economic circumstances." So to fix it, Warren wants to tax the actual wealth people have, but only for the very, very rich, the 0.01%.

Do rich people Pay Lower Taxes Than You?

Why isn’t the income tax sufficient for taxing the super rich? Because many of the most advantaged members of society possess substantial wealth but low taxable income.

The overall tax rate on the richest 400 households last year was only 23 percent, meaning that their combined tax payments equaled less than one quarter of their total income. The rich pay lower tax rates than the middle class because most of their income doesn't come from wages, unlike most workers.

capital gains — which are taxed at a lower rate than wages and salaries — represent a larger share of pre-tax income for the nation’s wealthiest households. Data from CBO shows that income from capital gains represented nearly 22 percent of the total pre-tax income for the top 1 percent of households ranked by income, compared to less than 1 percent for households in the middle and bottom income quintiles. Intergenerational income transfers also often go untaxed or are taxed lightly. Estate taxes, for example, only require a filing if the combined gross assets exceed $11.4 million in value; such taxes apply to less than 0.1 percent of all decedents.

Instead, the bulk of billionaires' income stems from capital, such as investments like stocks and bonds, which enjoy a lower tax rate than income. It's the same reason why Warren Buffett famously said his tax rate was lower than his secretary's.

Tax revenues from Wealth taxation

Here's her proposal: All the wealth above the line of $50 million dollars would be taxed at 2% each year. All the wealth above 1 billion dollars would be taxed at 3% . So if you have $40 million dollars, you'd pay nothing. If you have 60 million dollars, you'd pay nothing on your first 50 million, but 2% on the 10 million after that, or $200 thousand. And if you have 2 billion dollars, you'd pay about $49 million.

A wealth tax could raise substantial revenues to address the daunting outlook for the deficit or provide funding for other initiatives. Revenue estimates for a wealth tax differ based on the components of the proposals and on assumptions about enforcement and evasion. For example, wealth tax, estimate that in 2019, $9.4 trillion of U.S. household wealth, or 51 percent of GDP, would be subject to a wealth tax with a $50 million threshold. Using those estimates, if a 1 percent wealth tax were imposed on all assets comprising that base and no evasion occurred, the tax would raise an additional $94 billion, or about 3 percent of total federal revenues in 2019. Bringing this tax to American shores might boost Treasury revenues, but it would certainly come with a number of challenges and negative economic consequences that we are going to discuss further.

Economic effects of a Wealth Tax

The primary economic effect of a wealth tax would be its impact on saving. Taxation can distort an individual’s saving behavior by reducing the potential return to saving. Saving is the act of putting money aside and delaying consumption for the future. A Wealth tax would make the rich consume more today and save less.

A decline in national saving would initially drive up interest rates and the required return for investors in the United States, but it would not lead to lower investment. Instead, the higher interest rates would attract lending from abroad. Foreigners would be willing to lend more to the United States because they would be able to hold assets without being subject to the wealth tax. Although, wealth tax would increase foreign lending to the United States, some investment would end up not happening by the 0.01% rich because of less available savings. GDP would decline somewhat, but the increase in foreign lending and foreign ownership of the U.S. assets would result in less total income for Americans, or lower GNP.

However, if the wealth tax does not lead to substantial increase in lending from abroad, the U.S. capital stock would shrink, leading to lower worker productivity and lower wages for workers. This long-run effect on workers would have distributional implications. The extent to which a tax on capital falls on workers depends on how it affects the capital stock.

 

Problems With Warren’s Solution

Critics cite few reasons to oppose a wealth tax. The first reason is that wealth taxes have failed in Europe. In 1990, there were twelve OECD nations including Austria, Denmark, Finland, France, Germany, Iceland, Ireland, Italy, the Netherlands, Luxembourg, and Sweden, with wealth taxes similar to Warren's. Today only four remain. The Swedish wealth tax also prompted large outflows of capital and the expatriation of well‐known business people, such as the founder of Ikea, Ingvar Kamprad. Henrekson and Du Rietz conclude, “The magnitude of these outflows was a major motivation for the repeal of the wealth tax in 2007.” It was the same story with the French wealth tax, which was imposed in 1982 and repealed in 2017. Over the years, a parade of French business people and celebrities left the country to avoid the tax — many going to Belgium, which is also a high‐tax country but has no wealth tax. The government estimated in 2017 that “some 10,000 people with 35 billion euros worth of assets left in the past 15 years” for tax reasons. Saez and Zucman argue that the wealth tax repeals in Europe were the result of poor policy choices. For example, European wealth taxes were levied on households with little cash but substantial illiquid wealth due to low exemption thresholds. To avoid this problem, Saez and Zucman advocate for a high exemption threshold. The authors note that the exemption threshold in Elizabeth Warren’s wealth tax proposal which is set at $50 million is 50 times higher than the typical European wealth tax. However, In a 2018 article for the International Monetary Fund, economists James Brumby and Michael Keen conclude: “The design of wealth taxes is notoriously prone to lobbying and the granting of exemptions that the wealthiest can exploit. Furthermore, the rich have proved adept avoiding or evading taxes by placing their wealth abroad in low tax jurisdictions.” Senator Warren and other liberals rightly denounce cronyism and tax avoidance by the rich, but a wealth tax would generate more of those ills. If Warren’s plan were enacted, the rich that falls under this exempted threshold would descend on Congress to lobby for exemptions while cranking up debt and hiding their taxable assets abroad or simply exiting the country. The final argument against a wealth tax are the potential negative economic impacts, such as lower GNP or a reduction in the capital stock or a decrease in innovation

Historical background

There are two major proposals to enact a wealth tax: one from Warren and another from Sanders. Warren’s proposal would enact a progressive wealth tax at two rates on net worth between $50 million and beyond $1 billion. Sanders’s proposal would enact an even more progressive wealth tax, with rates starting at 1 percent per year and reaching 8 percent per year starting from net worth $30 million. Other proposals include, in 1999 Donald Trump proposed a one-time well tax over 14%. As president he blew up the debt and deficits with tax cuts for the rich infected the US Treasury set to borrow a trillion dollars for the second year in row to finance the Trump deficit. Bill Clinton and Barack Obama got called socialists just for raising the top tax rate a few percentage points. However, Warren's plan is far more radical than those.  Solutions and closing thoughts The proposal opens the window of policy debate with ideas like raising the top rate for the super-rich to closing corporate tax loopholes or raising capital gains rates for assets held under five years or dividend tax to better target the super-rich. Promoting more competition in the US economy could prevent successful entrepreneurs from quickly establishing lucrative dominant positions. A new national income tax that would tax all income, whether from labor, capital or other sources as a supplement to the existing income tax. It will also favor a wealth tax. However, Based on it's failure in other countries and her vague proposals for addressing those failures, there's no compelling evidence that Warren's Ultra Millionaire Tax Will raise the revenue she claims. The wealth tax is best understood not as a targeted revenue raiser.

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