Exploring Elizabeth Warren’s Wealth Tax

Photo by rawpixel on Unsplash

Inequality Has Been Rising

The global economy has seen significant growth over the past ten years. The bad news is that growth is not benefiting everyone. A smaller number of people are reaping a disproportionately large share of that growth.

Global economic inequality is on the rise as illustrated by these stats from the World Economic Forum;

  • 1% of the world’s population holds 35% of global wealth
  • That represents a greater share than the bottom 95%
  • One in ten people in the world still live on less than $2 per day
  • The Eight richest men in the world have more wealth than the poorest 3.6 billion people

Inequality in the U.S has also been on the rise

  • In 1980 the top 1% of income earners accounted for 9% of total income. By 2015 The top 1% accounted for 22% of total income
  • In the early ’70s, the top 0.1% accounted for less than 1% of total income. By 2015 the top 0.1% accounted for more than 5% of total income.

Why Income Taxes Have Failed to Slow Inequality

The objective of a progressive income tax system is to tax each person based on that person’s ability to pay the income tax. That has led to the creation of “tax brackets”. The lower income tax brackets apply a lower marginal tax rate than the higher income tax brackets.

Here are the 2019 U.S Federal income tax brackets, via Smart Asset:

  • 10% on the first $9,525 of earned income
  • 12% on earned income between $9,526 — $38,700
  • 22% on earned income between $38,701 — $82,500
  • 24% on earned income between $82,501 — $157,500
  • 32% on earned income between $157,501 — $200,000
  • 35% on earned income between $200,001 — $500,000
  • 37% on earned income above $500,001

The idea is simple, those earning more than $500,000 per year will pay a higher percentage of taxes than those earning $40,000.

The problem is that very wealthy people generate their income in a very different way than ordinary people. Wealthy people generate a significant amount of their income through investments.

$100,000 generated through dividends and capital gains would result in less tax than $100,000 generated through working a 9–5 job.

This issue was brought into the spotlight during the 2012 Presidential election when reports surfaced claiming Mitt Romney only paid an effective federal tax rate of 14.1% despite having an annual income of $13.7 million.

The point is if a policymaker’s goal is to extract more taxes from the top 0.1% wealthiest people, income taxes alone are insufficient.

Elizabeth Warrens Wealth Tax

That leads us into the proposal put forward by Democratic Presidential candidate, Elizabeth Warren to implement a “wealth tax” on the top 0.1% of wealthiest Americans.

From what we know the proposal would be to levy a 2% tax on those who have more than $50 million in assets and a 3% tax on those who have more than $1 billion in assets.

Warrens proposal was developed by two Berkley Economists; Emmanuel Saez and Gabriel Zucman. Their analysis projects that this tax would raise an additional $2.75 trillion in tax revenue over the next 10 years. They project that the entirety of this new tax revenue would be paid by 75,000 families which represents less than 0.1% of the U.S population.

This would truly be a redistribution from the wealthiest 0.1%. This would be accomplished by taxing assets rather than income.

What I Like About It

The first thing I like about the plan is that it appears to be targeting the 0.1% rather than the top 10% or even 1%.

Far too often we hear politicians talking about taxing “the rich” more. The problem is how they usually define “The rich”. Often, they are talking about people making in the range of $250,000 per year.

While someone making $250,000 per year can provide their family a nice life, they still face many of the problems everyday people face. They probably still have a mortgage, a car payment, a cell phone payment, they want to save for their children’s education.

Billionaires never have to worry about making a mortgage payment or how they will pay for their children’s education. The gap between the top 10% or even the top 1% and the top 0.1% is so significant it’s difficult to for our brains to fully comprehend.

The $50 million and $1 Billion thresholds would achieve the goal of taxing the wealthiest among us. Not the 1% the 0.1%. This would not be targeted at your dentists and lawyers but at hedge fund managers and the Mark Zuckerberg’s of the world.

However, the question remains…

Would It Really Work?

As an academic exercise, this type of tax proposal is very straight forward. Increase the amount of tax on the wealthiest people and reinvest the money back into research, roads and bridges, schools, hospitals etc.…

Sadly, real life is more complex than academic models. There are several potential drawbacks that I would be concerned with.

The first is the issue of competitiveness. We live in a very interconnected global economy. Take Amazon CEO Jeff Bezos as an example. He has a current net worth of approximately $137 billion (prior to his divorce at least).

A 3% wealth tax would cost Bezos around $4.11 billion per in additional taxes per year. If he really wanted to avoid that tax, what would stop him from moving himself (and potentially his company) 143 miles North from Seattle to Vancouver?

If all countries in the world agreed to simultaneously implement the same wealth tax, this would work perfectly as designed and global inequality would likely fall to record lows.

Other countries would likely use this as an opportunity to lure billionaires and their businesses away from the U.S. In my opinion that is the biggest challenge for such a policy.

The other question I have, and likely the largest political hurdle to such a policy is “Do we trust the government not to squander the money?

$2.75 trillion over 10 years is a lot of money. It would be a true waste if that extra revenue was wasted away without any major accomplishments to point to or even a balanced budget. On the other hand, if there is a grand plan to use that money to build the next generation of infrastructure or combat climate change or lower taxes on the middle class then this tax might have some real positive impact.

I honestly don’t know who has more favorable polling numbers right now, the government or billionaires?

The answer to that question might determine if this proposal has legs or is dead on arrival.