By Veronique de
Rugy
Thursday, September
26, 2019
A tax on wealth would be economically destructive,
fiscally ineffective, and possibly unconstitutional
It seems like everyone is talking about the wealth tax.
Many Democratic presidential hopefuls have endorsed it as a way to address
income-inequality concerns. There is also the promise that it would raise much
money from the richest Americans and pay for all the new entitlements Democrats
think Americans lack. However, a careful examination of the evidence reveals
that such a tax is unlikely to achieve any of these goals. It is also
misguided, as the negative consequences from the tax will reach far beyond the
richest Americans.
Consider the version of a wealth tax proposed by
Elizabeth Warren. She was inspired by the work of French economist Thomas
Piketty, who made the case for a global wealth tax in his blockbuster 2014
volume Capital in the 21st Century. Since then, Warren has tapped the
research of UC Berkeley economists Emmanuel Saez and Gabriel Zucman (each of
whom is also French).
Senator Warren’s proposal is straightforward. It would
target the “richest 0.1 percent of Americans.” Households with a net worth of
$50 million or more would pay an annual tax of 2 percent on every dollar of net
worth above $50 million and 3 percent on every dollar above $1 billion. Warren
believes that with this wealth tax she can raise $2.75 trillion over ten years,
which is a good thing because she has a ton of new programs that she would like
to implement.
A main problem with her tax is that the net worth of a
rich person isn’t as straightforward as proponents of wealth taxes would like
you to believe. Net worth includes all assets, some of which are easier to
value than others. The value of assets such as stocks, bonds, and real estate
are pretty easy to measure. But many other assets — such as cryptocurrencies,
trusts, and private businesses — are harder to assess.
That’s why wealth taxes are always so hard to administer
and so easy to avoid. It makes them a terrible vehicle for raising money. And
it explains why many governments used to have a wealth tax but few still do
today. According to a paper by Daniel Bunn of the Tax Foundation, “the number
of current OECD members that have collected revenue from net wealth taxes has
grown from nine in 1965 to a peak of 14 in 1996 to just four in 2017.” He adds
that “among those four OECD countries collecting revenues from net wealth
taxes, revenues made up just 1.45 percent of total revenues on average in
2017.” Yes, it is a difficult tax to collect.
France was one of the four countries that had a wealth
tax in 2017, but it dropped the tax in 2018. (Belgium adopted its own wealth
tax, meaning that the total number of countries with a wealth tax today is
still four.) I would think that if the French government — of all governments!
— dropped the wealth tax, that should be a powerful clue that the levy isn’t
all that Warren dreams it will be. But apparently the senator thinks she can
avoid any problems by implementing anti-avoidance measures such as a repressive
40 percent exit tax on any targeted household that attempts to emigrate,
minimum audit rates, and increased funding for IRS enforcement. Warren clearly
doesn’t believe in freedom from persecution.
But there are deeper problems with a wealth tax. First,
there seems to be a profound misunderstanding of what wealth is and where the
money will come from. Listening to politicians who support the levy, you get a
sense that rich people use their wealth almost exclusively to fund extravagant
consumption. Tax their wealth and these rich people will simply downgrade their
houses — and still be left with gigantic palaces — or otherwise reduce their
unnecessary consumption expenditures.
Yet nothing could be further from the truth. Instead,
that wealth is tied up in other wealth-producing activities. It’s invested in
companies; it is used to fund R&D that will create better goods and services
for consumers; it is the capital that innovators and producers borrow from
banks to grow their businesses.
Over at the Tax Foundation, Kyle Pomerleau and Nicole
Kaeding add that capital is easily spooked by higher tax rates — and the more
mobile, the more easily it’s spooked. This sensitivity is heightened by the
fact that the tax is applied to wealth that has already been subjected to the
income tax. That’s the case, for instance, with dividends from corporate
stocks. This double taxation obviously creates a real disincentive to
accumulate capital. For all these reasons, the rich taxpayers who cut the IRS
wealth-tax checks will be only a subset of those who will feel the burn from
the tax. Every dollar that goes to the IRS to pay the new tax is one less
dollar of capital that could be lent and/or invested for innovation, business
expansion, and worker training. In short, economic growth that benefits us all,
especially the poor and middle classes, will inevitably be slowed.
Incidentally, the wealth tax’s negative impact on
investments was one of the reasons mentioned by the French government in 2017
for ending it. In its place, the government imposed a tax on real estate, which
is easier to assess and is imposed on assets that are much less flighty than
are equity and debt claims.
There is also a question as to whether a wealth tax in
the United States would even be constitutional. Most experts will agree that,
with the exception of the income tax, which is authorized by the 16th
Amendment, the Constitution prohibits federal direct taxes that are not
apportioned by population. The question then becomes whether the wealth tax is
a direct or an indirect tax. On this point experts disagree. Even if
implemented, the wealth tax may end up being tied up in the courts for years.
Finally, it is worth noting that the renewed interest in
the wealth tax is based on concern about income inequality. The Piketty book,
which itself was based in part on a 2003 paper by Piketty and Saez, fueled that
narrative. Then, in 2016, Saez and Zucman, who are now advising Warren (while
Piketty has endorsed her wealth-tax proposal), published a paper that found
that the share of total wealth held by the top 1 percent in the U.S. increased
from 24 percent in 1980 to 42 percent today. In recent years, however, a small
but growing number of scholars (see the work of Scott Winship and Phillip
Magness) have questioned the statistical foundations of these papers.
For instance, Magness highlights new findings by the
Federal Reserve that offer a sharp departure from the Saez/Zucman narrative.
The Distributional Financial Accounts (DFA) series of quarterly data on
household wealth concentration from 1989 to the present shows that the wealth
share of the top 1 percent increased from about 23 percent to 29 percent
between 1989 and 2012. That’s significantly smaller than the
14-percentage-point jump reported by Saez and Zucman.
The Congressional Budget Office offers another
perspective, this one using post-tax income measures, as opposed to the pre-tax
measures used by the Berkeley economists. A recent paper by Stephen Rose at the
Urban Institute looks at different studies across the economic spectrum. Rose
reports that the findings by Piketty and Saez are outliers. It must be their
French technique.
This matters because the widespread embrace of the
Saez/Piketty/Zucman narrative about income inequality fuels the recently
growing enthusiasm for a wealth tax in America. It would be a shame to base our
tax policy on a flawed academic fad. In addition, an extensive academic-literature
review performed by Scott Winship — who now heads the Social Capital Project
for the Joint Economic Committee of Congress — and published in 2013 in National
Affairs reveals that there is “little basis for thinking that inequality is
at the root of our economic challenges, and therefore for believing that
reducing inequality would meaningfully address our lagging growth, enable
greater mobility, avert future financial crises, or secure America’s democratic
institutions.”
If that is the case, making inequality reduction the
be-all and end-all policy goal to justify the implementation of a wealth tax
reveals either disdain for the findings of academic studies or a very serious
and ugly dislike of wealthy people — or, perhaps, both.
I will conclude with a word of advice: Democrats should
be careful that their relentless pursuit of much higher taxes on the wealthy
doesn’t backfire. A new poll by the Cato Institute’s Emily Ekins finds that
while 55 percent of Americans believe the distribution of wealth in the United
States is “unjust,” 71 percent of Americans feel more “admiration” than
“resentment” toward the rich, 69 percent agree that billionaires “earned their
wealth by creating value for others,” 75 percent disagree that “it’s immoral
for society to allow people to become billionaires,” 62 percent disagree that
billionaires are a threat to democracy, and 62 percent oppose redistributing
wealth from the rich to the poor.
No comments:
Post a Comment