As Senator Elizabeth Warren prepares for Thursday’s Democratic debate in Houston, she is the first viable candidate for the presidency in decades to propose a direct wealth tax. In January it unveiled a plan to levy a two percent tax on assets over fifty million dollars and tax three cents on every dollar of assets in excess of one billion dollars. Since then, economists have been discussing the practicability and desirability of the proposal. During a conference at the Brookings Institution in Washington last week, some of the key players faced each other. Many of the technical issues they raised were important, but for me the main thing was the groundbreaking nature of Warren’s proposal.
In theory, the United States is already taxing wealth – the holdings of cash, financial instruments, real estate, equity in private businesses, and household goods – through estate tax. However, this levy applies to wealth accumulated over the course of a lifetime, and the high limit rate on large estates (currently forty percent) has generated strong avoidance (some legal, others illegal) and political opposition. In 2001, a Republican-controlled Congress passed law to completely abolish inheritance tax. This law expired in 2010 and the tax was revived in an even weaker form. Trump and the 2017 GOP tax reforms further reduced the impact of the estate tax by doubling the exemption threshold.
Rather than trying to fix some of the gaps in the estate tax proposed by the Obama administration, Warren proposed a new tax that has the double political advantage of sounding humble (two cents on the dollar) and if it works as advertised to bring in a lot of revenue – $ 2.75 trillion over ten years, the campaign said. Unlike inheritance tax, it would be paid annually and applied on a basis – those with the largest wealth in the country – that has grown tremendously over the past four decades, driven by rising asset prices and a sharp increase in asset concentration, especially at the very top.
At the Brookings conference, Emmanuel Saez and Gabriel Zucman, two Berkeley economists who advised Warren on their tax plan, presented a paper in which they estimated that the richest 0.1 percent of US households (there are roughly one hundred and seventy-five thousand) of them) own about twenty percent of total wealth, compared to less than ten percent in 1980. Over the past forty years, the wealth of the wealthiest four hundred households has quadrupled to 3.5 percent, Zucman calculated in a study based on the current and the Post version of the Forbes 400 list. This enormous accumulation of wealth has changed the budget accounting. A two percent wealth tax applied to a quarter of a million dollars in a family’s lifetime savings brings in five thousand dollars. The same tax that is applied to a billion dollar fortune brings in $ 20 million. If used every year for twenty years it makes four hundred million dollars.
When you make these kinds of sums for every family worth at least fifty million dollars, the earnings add up quickly. “We can provide universal childcare for every baby in this country between the ages of zero and five – two cents!” Warren said last weekend in New Hampshire. “Universal Pre-K for every three and four year old in this country – two cents! Raise the wages of all childcare workers and preschool teachers in this country – two cents! We can do all of that and make the technical school, community college, and four year college free for anyone wanting an education – two cents! “
Not only would the Warren Tax have raised a lot of money – assuming it worked – it would have two other benefits. It would restore some progression to a tax system in which people like Warren Buffett and Mark Zuckerberg pay a lower effective tax rate than many ordinary families, and if it is maintained it would gradually eradicate some of the alarming rise in wealth inequality we have been in seen over the past few decades.
Two of the diagrams presented by Saez and Zucman illustrate these characteristics. The first shows that the current federal tax system is slightly progressive up to the 99.99 percentile of households that pay an effective tax rate of thirty-three percent. But the richest households – members of the 0.01 percent – get a break. In fact, Saez and Zucman estimate that those on the Forbes 400 list pay an effective tax rate of just 23 percent. The Warren tax would replace that downward bend in the tax plan with an upward trend: the wealthiest four hundred households would pay an effective tax rate of more than forty-five percent.
Over time, the cumulative effect of wealth tax would make a huge difference in the distribution of wealth, as the second graph shows. “The wealth share of the top 400 has increased from less than 1% in 1982 to almost 3.5% in 2018,” stated Saez and Zucman in the lengthy paper they presented at the conference. “With a moderate wealth tax since 1982, their share of wealth would have been around 2% in 2018.” According to the authors’ calculations, the impact on some of the richest people in the country would be even more dramatic. If some version of the Warren Tax had been in place since 1982, Jeff Bezos would be worth $ 86.8 billion instead of one hundred and sixty billion. Bill Gates would be worth $ 36.4 billion instead of ninety-seven billion. And Buffett would be worth $ 29.6 billion instead of $ 88.3 billion.