Every few years, the idea of a wealth tax resurfaces in American politics. The concept is simple enough. Instead of taxing income, the government would impose an annual tax on accumulated wealth, whether that is stocks, bonds, real estate, or other assets. Last week, Senators Bernie Sanders (I-VT) and Ro Khanna (D-CA) introduced legislation for a 5 percent wealth tax on the billionaires. Sanders claims that this tax could generate $4.4 trillion in tax revenue over the next decade, revenue that Sanders would like to use to pay for Medicaid expansion, affordable housing, and a $3,000 in direct payments to households.
The theme of a wealth tax is hardly a new topic here at Libertarian Jew. I first covered it in 2014 when economist Thomas Pikkety proposed a global wealth tax. I did so again in 2019 when Senator Elizabeth Warren (D-MA) proposed a wealth tax. While the details of the proposal can change from one to the next, the evidence consistently shows the problematic nature of the wealth tax. I will use my 2019 argument as the basis for my current argument and update the data as needed.
Other countries have abandoned the wealth tax. In the 1990s, the number of OECD countries with a wealth tax peaked at 12 countries. Now, the figure is at four countries: Norway, Spain, Switzerland, and Colombia. Much of the remainder of this piece will get into the "why" of this decline.
The wealth tax is difficult to valuate. As the OECD points out (p. 69), a difficulty with the wealth tax is figuring out assets are worth. Unlike income, which is recorded through transactions, wealth often consists of assets that lack clear market prices, such as family businesses, land, or valuable collections. Determining their value requires subjective appraisals that can be expensive, inconsistent, and easily contested.
High elasticity. Another question is how sensitive wealthy people are to wealth taxes. This responsiveness to a tax increase or decrease, known in economics as elasticity, gets at how much an individual can tolerate a tax change. In the Spanish case study, tax filers' taxable wealth decreased by 42-51 percent. Similarly in Colombia, a 1 percent decrease in the wealth tax led to an immediate 2 percent increase in wealth for those near the threshold. In Scandinavian countries, a one-percentage point increase in the wealth tax led to a decrease of stocks by wealthy taxpayers by 2 percent.
It is no mystery: people do not want to pay the wealth tax. People can use the legal system with tax avoidance, whether through moving taxes in tax-exempt accounts, underreporting wealth, inflating liabilities, or claiming deductions strategically. These are the types of responses with lower tax rates. Imagine what it would be like with a 5 percent wealth tax rate!
It is also worth noting that Sanders' rhetoric about "millionaires and billionaires" softened in recent years. He conveniently dropped the "millionaires" around the time he himself became a millionaire. I guess it is easy to champion taxing the rich as long as you get to redraw the definition of "rich" to leave yourself out.
Rosy estimates and evasion rates. Economists Emmanuel Saez and Gabriel Zucman estimated that Sanders' wealth tax would generate $4.4 trillion in the next decade. They were the same economists that calculated the estimate for Elizabeth Warren in 2019. Warren's tax was at 2 percent for wealth between $50 million and $1 billion, and 3 percent for anything above. For Warren's version, the economists assumed a 15 percent tax evasion rate. What I find peculiar is that these economists assume a lower evasion rate with Sanders' version, even though it is a higher tax rate.
Forget that one of the co-authors, Zucman, co-authored a paper showing that those in the 0.01 percent have a tax evasion rate upwards of 30 percent. Other tax experts are not buying it. As the Tax Foundation points out, if you assume an evasion rate closer to that paper that Zucman co-authored, Sanders' estimate would decline to $3.3 trillion over 10 years. Senior Fellow Kyle Pomerleau at the American Enterprise Institute is even less optimistic. Once factoring in behavioral responses, Pomerleau estimated that it would be $2.3 trillion over the next decade.
Wealth tax does not generate that much revenue. The issue of unbridled optimism is not confined to these two economists that Sanders hired. Historical experience shows how little revenue wealth taxes truly generate. With Sanders' estimates, his annual average of $440 billion would be the equivalent of 1.4 percent of GDP, given that the most recent GDP figures had it at $31.10 trillion.
Looking at historical data, it has been quite low. That was a conclusion of that lovely OECD report on wealth taxes (p. 18). The Tax Foundation was kind enough to gather the historical wealth tax data on the few countries that still have a wealth tax to show that with very few exceptions, the wealth tax revenue does not exceed 1 percent of GDP (see below).
Conclusion. All of this adds up to a simple conclusion: wealth taxes are inherently tricky, easy to evade, and historically generate far less revenue than proponents claim. Sanders' proposal may sound ambitious, but experience teaches us that wealth taxes provoke capital flight, creative accounting, and behavioral shifts that shrink the tax base. Let's be real: taxing billionaires at 5 percent is less a sincere fiscal plan and more a social media stunt dressed up as economics.
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