Eight Reasons Why Elizabeth Warren's Wealth Tax Is a Poor Idea

Since the Democrats regained power in Congress, they have been pushing for their wholly unoriginal idea of increasing taxes on the wealthy. Democrats are eyeing a corporate tax increase, which would be a reverse trend of the Republican's tax reform bill: the Tax Cuts and Jobs Act. Earlier this month, freshman Congresswoman Alexia Ocasio-Cortez (D-NY) proposed a misguided marginal tax rate of 70 percent that got a lot of people talking. Now it's Senator Elizabeth Warren's (D-MA) turn. Last week, Warren proposed to levy a 2 percent wealth tax on assets over $50 million, and a 3 percent wealth tax for assets over $1 billion.

Since it is a progressive tax, the first $50 million would be taxed at 0 percent, and anything between the $50 million and $1 billion mark would be taxed at 2 percent. Anything above $1 billion would be taxed at three percent. Since both income and wealth inequality have reached new highs, Warren hopes that a wealth tax could redistribute the wealth and mitigate the inequality. Economists Emmanuel Saez and Gabriel Zucman estimate that Warren's wealth tax could generate $2.75 trillion over the next ten years. Most Americans don't make over $50 million, which means it has populist appeal, and it is calculated to generate a fair amount of income. The Left-leaning Institute for Tax and Economic Policy (ITEP) released a report just last week making the case for a wealth tax, which means the idea is catching some traction. What could possibly go wrong? I covered the topic of a wealth tax in 2014. I will use that 2014 analysis as a starting point for this 2019 analysis, as well as the OECD's April 2018 report on wealth taxes, but the short answer is "plenty could go wrong." Here are a few issues with Warren's plan to implement a wealth tax:

1. The wealth tax is difficult to valuate. One of the advantages of an income tax is that it is easy to determine one's income: just use the W-2 or 1099 Form. Not so with wealth. Wealth includes land, stocks, bonds, cash, cars, retirement savings...you get the idea. What is more is that determining the value of these various assets is more subjective than determining one's income (OECD, p. 69). 
2. The wealth tax can be evaded. Especially with increased capital mobility over time, which won't go away anytime soon, tax avoidance and evasion have increased (OECD, p. 67). To provide a U.S.-based example, the closest thing the United States has to a federal wealth tax is the federal estate tax. As the Left-leaning Center on Budget and Policy Priorities points out, wealthy people have been able to evade an amount equivalent to a third of the estate tax revenue raised since 2000. Granted, this was primarily caused by the GRAT loophole. Saez and  Zucman expressed confidence in Warren's plan lacking such loopholes. 
• In spite of Saez and Zucman's confidence, there are multiple ways to get around the wealth tax, including hiring tax attorneys to exploit IRS loopholes, dividing assets among family members, divorcing for tax purposes (if there are different asset thresholds), moving it overseas, and hiding it in trust funds (e.g., OECD, p. 67-68). Warren might be able to address some of these shortcomings, but it's also true that people will find new ways to get around the wealth tax.
• According to a Swiss case study co-authored by the co-architect of Obamacare, a 0.1 percent increase in the wealth tax resulted in the wealth reported to the government to drop by 3 percent (Gruber et al., 2016). 
• As former Republican tax policy advisor Alan Cole points out, since it is difficult to enforce the wealth tax, it is easier to go the route of the capital gains tax than it is the wealth tax. 
3. Other countries have abandoned the wealth tax. In 1990, 20 countries from the OECD (Organization for Economic Cooperation and Development) had a wealth tax. Now, only four countries have a wealth tax: France, Norway, Spain, and Switzerland. The Executive Summary in the OECD's April 2018 report on wealth taxes points out that the wealth tax repeals were "justified by efficiency and administrative concerns and by the observation that that net wealth taxes have frequently failed to meet their redistributive goals." If they frequently failed to meet their redistributive goals, that will end up being a problem for Warren since that is the primary reason she is advocating for the wealth tax in the first place. 
• Since 2000, France had 60,000 millionaires leave France because of a high wealth tax. French President Emmanuel Macron limited and lowered the wealth tax to mitigate the capital flight. 
4. The wealth tax in other countries have not collected a lot of revenue. Saez and Zucman believe that the wealth tax would contribute $2.75T over ten years, or an annual average of $275B. As the OECD report shows (p. 19-20), most countries kept their wealth tax revenue collection below 0.5 percent of GDP. Switzerland's 3.7 percent is explicitly stated by the OECD as an exception to the norm (p. 18). If we use the BEA's 3Q 2018 GDP estimate of $20.66T as a basis for the GDP, that would be 1.33 percent of the GDP. Adjusting the GDP for inflation would still not get the desirable figure: Saez and Zucman's estimate is rosier than historical data. The past, especially that of other countries, is not indicative of the future. At the same time, what the historical data show is that other countries have found it challenging to have rich people pay the wealth tax. The burden of proof would have to be on Warren to prove how her plan would be different from the other countries that tried and ultimately abandoned the wealth tax.  
5. The wealth tax poorly targets capital income. As the Tax Foundation explains, the wealth tax poorly targets capital income (or simply capital) because the wealth tax goes after normal returns. What it should be going after instead are the super-normal returns, which are the returns that go above the amount needed to compensate someone for saving and subsequently delaying their consumption. Since super-normal returns are unexpected, they do not have as much potential to distort investment decisions. 
6. The wealth tax lowers economic growth. In its 2014 analysis of Thomas Pikkety's global wealth tax, the Tax Foundation calculated that it would reduce GDP by 0.49 percent per annum. On the other hand, a 2010 World Tax Journal analysis calculated it at just 0.02-0.04 (Hansson, 2010). In either case, no one is arguing that the wealth tax is going to boost the GDP.
7. The wealth tax affects more than the super-wealthy. Savings finance business investment. This drives more than wealth for the rich or the economy. The capital acquired by these super-wealthy individuals is used to employ others, create products that are consumed by other individuals, or generates wealth for pensions and retirement accounts. 
8. The wealth tax is arguably unconstitutional. The Constitution prohibits federal direct taxes that are not apportioned by the states (Article I, Section 9, Clause 4). The exception to this rule is the income tax since the Sixteenth Amendment creates a separate constitutional provision. Given the nature of the wealth tax, it could be classified as a direct tax. It might not be clear whether a wealth tax would constitute a direct tax, but one thing that is clear is that it would be challenged in court shortly after Warren attempted to implement it.

As the OECD points out (p, 59), the wealth tax does not work in isolation. Its effects depend on the overall composition of the tax code. At the same time, there are considerable and observable drawbacks to the wealth tax that Warren would rather not mention. Given that we are approaching an election cycle, this will not be the last the American people hear of income inequality or higher taxes for the rich.