Is A Wealth Tax Actually Unrealistic?
Spoiler alert: No
The idea that first comes to mind for how to curb wealth inequality is, for most people, through a wealth tax. This has never been tried out in American history before, but is now being proposed by Democratic presidential candidates Bernie Sanders and Elizabeth Warren.
As expected, this idea has been getting a lot of criticism from those who dislike left-wing policies, but also from some who claim to support it in principle but point to implementation problems. Those in this latter camp believe that a wealth tax is unfeasible and impractical—for instance, take this tweet thread by Andrew Yang or this article* by the New York Times. The gist of the argument is that ideally the rich would be taxed, but the rich don’t care about that and so will always evade the taxes, and therefore there is no point.
It always surprises me to see how quick some are to buy into this line of reasoning—it echoes the Republican “criminals will always find a way to get a gun” argument very strongly. This, of course, is a ridiculous argument, because by that line of logic nothing should be criminalized and we should disband the police. It is quite surprising to see Democrats who spot this flaw so clearly in the context of anti-gun control debates mirror it exactly in wealth tax debates.
Yes, there are ways to evade taxes. But yes, there are ways to prevent people from evading taxes. That is not an impossible pipe dream.
For instance, Andrew Yang says that the wealthy would do things like get a divorce, change their legal guardianship, or even renounce their American citizenship.
First of all, there is little statistical evidence that such drastic measures would be a common occurrence in response to raising taxes. Unlike in the EU, Americans can’t easily move to a neighboring country to escape national taxes.
Nevertheless, imagine desperate multibillionaires did indeed want to evade taxes in this manner. The answer to that is very simple. Both Sanders’ and Warren’s tax plan have an exit tax that would take 40% of a person’s wealth if they renounce their citizenship (given that that person is above their respective wealth thresholds). Sanders’ tax plan also does not provide any taxation advantage to marriage (unlike Warren’s) and hence does not provide any incentive to divorce. It is possible to close these loopholes.
Many have also pointed to the fact that 10 of the 16 European countries that had a wealth tax since 1995 have since scrapped it. However, this becomes much less meaningful once you look at the context. In the case of France, this was at least in part in order to “attract more foreign investment.” Other countries did away with theirs in part because their wealth tax started at a significantly lower threshold that affected regular people, and so repealing them was politically popular.
It is true, though, that it was also often cited that it redeemed unexpectedly low amounts of revenue—the wealthy could hire smart tax lawyers to hide, divide, or shift their assets to evade these taxes, and this created much less revenue than projected, which made the administrative burden not worthwhile. Part of the reason why it was not worthwhile is because income and inheritance taxes tend to be higher in Europe, so they have less of a need for wealth taxes, and they also have significantly less income inequality, so they also have less of a need for wealth taxes. If America raised other taxes — capital gains taxes, inheritance taxes, estate taxes, property taxes, the top marginal tax rate—such that this became true of it too, perhaps the “it’s not worth the effort” argument would hold here, but alas it does not.
Still, the unexpectedly low revenue is a problem. Thankfully, in Warren’s own words, she has “specifically designed this proposal to account for lessons learned from wealth taxes in other countries,” (as, of course, did Sanders). Neither of their tax plans have exemptions for certain types of assets like the European ones did, leaving no room for the loopholes that made those taxes easy to avoid and hence being much more comprehensive. They have also, in their respective tax plans, outlined how they will measure the value of wealth using third parties—this is always going to be an estimate, and hence has also been a point of criticism, but as long as we have some way of measuring wealth that is applied uniformly (it need not be perfectly precise), I do not see a problem. Further, as Bernie explains in his plan, “Under current law, the IRS is already required to assess the net worth of the wealthiest Americans when they pass away, to calculate estate tax liability.” Those who yell, “But Europe!” without taking all these critiques into account have an argument too superficial to be meaningful.
It is clear, of course, that although it can be significantly reduced by taking measures like these, there will always be tax evasion. There is still reason for a wealth tax, of course. Even if we manage to tax only some of the intended wealth, we are still better off than in the comparative when we taxed none. In fact, studies estimate that the wealthy would be able to evade Warren’s tax plan by reducing their reported net worth by up to 15%, and the $2.27 trillion figure that you may heave heard her touting around that her tax plan would create takes this figure into account. We don’t need it to work perfectly—we need it to work sufficiently. This should be implicitly understood.
Our friend Gregory Mankiw who wrote the New York Times article from earlier has one last damning critique. In his own words, a wealth tax “hits the frugal executive hard but leaves the spendthrift without a scratch.” It is worth noting that you cannot simultaneously critique a wealth tax for being futile and also for hitting a frugal executive hard, but let’s continue. He then implores the reader to agree with him that wealth taxes are bad “if you, like me, think that society could benefit from fewer spendthrifts and more savers.”
We must keep in mind that these wealth taxes only apply to wealth above $32 million in Sanders’ case or $50 million in Warren’s. There is no reason for these people to be saving their wealth—this is known as wealth hoarding. Much the opposite is desirable—we want the rich to spend their money. No one (besides his ranking in Forbes) benefits from Buffet’s billions sitting in his savings account, but if he chooses to spend them, those billions will end up circulating hundreds of hands within the economy. Buffet’s fortunes would go from doing nothing to entering both the public (through taxation) and private (through spendthrift-ing) sectors. If you believe billionaires are job creators and philanthropists, you should be especially excited that a wealth tax would incentivize these behaviors even more.
74% of Americans support a wealth tax. The reason they do is clear—it is absurd to have the elites of this country have so much money that they literally do not know what to do with it, while 40% of Americans would struggle to cover a $400 emergency. And it is also clear that many who argue against it are doing so either in bad faith or in an ill-informed way.
No, it will not work perfectly. Yes, it will work sufficiently.
*To be clear, this guy literally wrote a piece titled In Defense of the One Percent, so I think it is fair to say he is not exactly one to agree with a wealth tax in principle, but his article is a good example of the argument at hand anyway. Also, if you clicked on it, I am deeply sorry I made you read an article from the New York Times.
