By Robert VerBruggen
Tuesday, March 02, 2021
Elizabeth Warren’s wealth tax is back.
Together with a handful of co-sponsors including Bernie Sanders, she’s
introducing a bill that would impose a 2 percent (excuse me, “two-cent”)
annual tax on wealth above $50 million, plus an extra 1 percent tax on wealth
above $1 billion. The tax on billionaires would automatically rise to 6 percent
total if the U.S. enacted single-payer health care.
Conservatives tend to recoil at this kind
of thing for a number of reasons. For one, the federal government already taxes
people’s money as it comes in, through taxes on income, capital gains, inherited
estates, etc. A wealth tax hits people merely for keeping their money after
it’s already been taxed, which just seems wrong.
But there are a number of practical issues
here too, which I’d like to outline briefly in honor of the new proposal.
1. Will the courts strike this down as unconstitutional?
The Constitution has some rules for
federal taxes. The 16th Amendment gives the government broad authority to tax
incomes, but otherwise, any “direct” taxes have to be apportioned among the
states in proportion to their populations.
Warren’s tax applies to the ultra-wealthy
wherever they happen to live, and it does nothing to ensure that the total
burden ends up being proportional to state populations. It would be pretty hard
to rejigger the tax to make it follow the direct-tax rule, since some states
have far more rich people, per capita, than others.
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So does a wealth tax count as a direct tax
or not? It’s controversial, because the term is not defined in the Constitution
and the historical record is a bit muddled.
Erik Jensen is one of the leading legal
scholars who argue that a wealth tax would qualify as a direct tax. Here’s how
he put his case in a 2019 City Journal article:
The
Founders . . . assumed, almost without exception, that a land tax is a direct
tax. And a land tax was a wealth tax: well-to-do Americans in the late
eighteenth century had most of their wealth tied up in real estate . . .
The
Supreme Court in 1895, in the Income Tax
Cases, concluded that a tax on any
property, not just real estate, is direct. That understanding was reiterated as
recently as 2012 when, writing for a majority in NFIB v. Sebelius, Chief Justice John Roberts . . . wrote that only
two types of taxes are unquestionably direct — a tax on property, and a
capitation or head tax (levied on all persons without regard to income or
circumstances).
Bruce Ackerman, by contrast, would define
the provision more narrowly. Here’s how he put
it in Slate:
The
[Supreme Court]’s 1796 decision in Hylton
v. United States served as a decisive precedent. Two years earlier,
Congress had levied a direct tax on luxury carriages, imposing it uniformly on
all carriages throughout the nation. The owners of fancy carriages immediately
protested that this tax on their wealth was one of the “other direct taxes”
that the capitation clause required to be apportioned on the basis of each
state’s population.
A
unanimous court rejected their claim. In his lead opinion, Justice Samuel Chase
made it clear that the “rule of apportionment is only to be adopted in such
cases where it can reasonably apply.” Because luxury carriages were not equally
distributed amongst the states, it was unreasonable to insist on apportionment.
It would be a close
call, and the Supreme Court could very well decide a wealth tax isn’t
allowed unless it’s apportioned by state.
2. Can we really administer such a thing?
In order to tax wealth, you have to tally
up how much wealth each person has, and that can be challenging. Publicly
traded stocks have obvious values, and localities with property taxes are
pretty good at valuing real estate. But other types of assets — closely held
companies, art, etc. — are harder.
How would Warren handle valuation? Well,
she’d direct
the treasury secretary to figure it out. So not only is this a big question
mark, but the rules could change whenever a new administration took over
enforcement.
On top of that problem, rich people might
be able to rearrange their affairs to avoid or evade the tax. (“Avoidance”
refers to legal ways of getting out of a tax, “evasion” to illegal ones.)
Evaluating the Warren plan, lefty economists Emmanuel Saez and Gabriel Zucman assume
15 percent evasion and avoidance. But we wouldn’t really know the exact
amount until we tried it.
As Saez and Zucman note, these taxes
depend “crucially on loopholes and enforcement.” Warren’s bill has only limited
exclusions (for certain types of tangible personal property worth less than
$50,000), and it would even stop people from renouncing their citizenship to
avoid the tax by taking 40 percent of their wealth if they did so. But
exceptions tend to build up when these policies go through the legislative
sausage-making process. (We wouldn’t want to tax the ownership of farms,
now would we?) Warren’s bill also has some funds for enforcement and requires
increased audits, but some administrations will be stricter than others, and
rich people are pretty good at hiding money when they need to.
There’s also the case of someone whose
money is tied up in a business, not immediately available to send to Uncle Sam.
Warren would let such people defer the tax for up to five years, which adds
another layer of complexity.
Issues like these are part of the reason
so many countries have ended wealth taxes
after trying them.
3. How much money would it raise, and how would that change over time?
That leads us to the question of how much
money the tax would raise. Saez and Zucman put the number at about $3 trillion
over ten years, rising to $4 trillion if the 6 percent tax goes into effect.
Those numbers are in the ballpark of a single year’s total federal tax
collections — so it’s a nontrivial boost to revenue.
Of course, if Saez and Zucman are wrong
about the amount of evasion and avoidance, especially after Congress has had
its way with the policy, they’ll be wrong about this as well. Other revenues
will also decline if the tax reduces economic growth, as some analysts predict.
There’s also the issue of what the tax
would do to wealth over the long term. A 2 to 3 percent tax probably wouldn’t
stop rich people’s wealth from growing — even relatively safe investments can
earn that much — but 6 percent is pushing
it. Saez and Zucman themselves write that the wealth of the folks on the Forbes 400 is growing at about 7 percent
annually after inflation. If we pass a high enough wealth tax and use it to
fund social programs, we could end up reducing wealth over time and needing to
find other funding for the programs.
***
There are good philosophical arguments
against taking people’s wealth simply because they have too much of it. But
this type of confiscation is also just a huge hassle. If Democrats’ goals are
to soak the rich and raise money, there are plenty of existing taxes they could
raise or reform instead.
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