Elizabeth Warren’s Wealth Tax: Three Practical Questions

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.

 

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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.