Good morning. What are the pluses and minuses of a wealth tax?
A tax protest in New York City last year.Justin Lane/EPA, via Shutterstock
Billionaires are different
Most Americans pay an annual wealth tax on their largest asset. It’s called
property tax. Each year, they pay an amount equal to a small percentage of the
estimated value of their house, and a house is by far the most valuable item
that most families own.
The very rich are different. While they pay property taxes too, their homes
tend to make up a tiny share of their net worth. The bulk of their assets are
not taxed.
In past decades, other taxes — like the corporate tax
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(the burden of which falls on stockholders) and the estate tax
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— served almost as de facto wealth taxes. But those other taxes have declined,
causing the total federal tax rate on the wealthy to plummet:
Source: Gabriel Zucman of the University of California, Berkeley
Over the same period, wealth inequality has soared
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Source: Gabriel Zucman of the University of California, Berkeley
Today, the wealthy both own a much larger share of the country’s assets than
they once did and pay less tax on each dollar of assets. This combination
creates problems for everybody else. Many Americans own only modest assets, and
the federal government struggles to raise enough tax revenue to pay for
society’s needs, like education, health care, transportation, scientific
research and the military.
This week, Senate Democratic leaders proposed a solution, in the form of a new
kind of wealth tax
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People with at least $1 billion in net worth or $100 million in annual income
would be taxed each year on the increase in the value of many of their assets.
The fate of this specific tax is uncertain, after Senator Joe Manchin expressed
skepticism of it yesterday. But wealth taxes — which also featured in the 2020
Democratic presidential campaign
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— will probably remain part of the political debate in the years ahead, given
the country’s level of inequality.
Today, I want to evaluate the most common objections to wealth taxes. Some are
stronger than others.
1. They’ll destroy the economy
This is probably the weakest empirical argument against a wealth tax. It’s a
version of the same case that opponents of tax increases on the rich always
make. And it has a very poor historical record.
When taxes on the rich were much higher than today, in the decades just after
World War II, the economy boomed. Since the 1980s, high-end taxes have
plummeted, and the U.S. economy has struggled: Economic growth, incomes for
most people and other measures of well-being (like life expectancy) have
stagnated since the 1980s. One exception was the 1990s — after Bill Clinton had
raised income taxes on the rich as well as the corporate tax.
Teasing out cause and effect on these issues is difficult. But there is no good
evidence that low taxes on the wealthy help the larger economy.
2. They’re doomed to fail
One part of this argument also has little evidence to support it, while another
is more debatable.
The weaker part claims that the wealthy will figure out a way to avoid all the
effects of a tax increase. That, too, is historically inaccurate. When the
federal government has raised tax rates on the rich, tax payments by the rich
have risen.
“Many people have the view that nothing can be done,” Gabriel Zucman, an
economist at the University of California, Berkeley, has told me. “That’s
wrong. Look at history.”
Here’s another way to think about it: If the very rich could actually avoid the
effects of tax increases, they probably wouldn’t spend so much money and effort
trying to defeat proposed tax increases.
The more serious argument is that creating a new wealth tax would be more
logistically difficult
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than raising existing taxes, like the inheritance tax, corporate tax or income
tax. (Senator Kyrsten Sinema of Arizona and nearly all Republicans evidently
oppose many of those other increases, making them impossible to pass and
causing some Democrats to turn their attention to wealth taxes.)
A new wealth tax would require federal officials to do something new: estimate
the value of assets each year. They would also have to decide which were
subject to taxation. Many experts consider these challenges to be surmountable,
but other countries have sometimes struggled with the details.
3. They’re unconstitutional
The federal government has the power to tax income, thanks to the 16th
Amendment. It is less clear which wealth the federal government can tax.
The tax code does already include some provisions similar to a wealth tax, like
a tax on mutual funds based on their current value. Still, the power to decide
what’s constitutional ultimates lies with the Supreme Court. Under Chief
Justice John Roberts, the court has been friendly to the interests of the
wealthy. The Roberts court has also been aggressive at times about overruling
Congress.
Even if the court threw out the wealth tax, other parts of the Democrats’ bill
— expansions of health care, education and clean energy — could survive, New
York magazine’s Jonathan Chait
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has pointed out.
The bottom line
A wealth tax is legally and logistically riskier than an increase in existing
taxes. But it also has advantages that those other taxes do not. It directly
addresses the enormous increase in wealth inequality over recent decades.
Unless the federal government takes steps to reverse that increase — through
existing taxes or new ones — economic inequality in the U.S. will almost
certainly remain near its current, Gilded Age-like levels.
More from Congress:
Democrats are likely to drop a national paid family leave program from
President Biden’s spending bill after Manchin opposed it
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The U.S. is one of six countries without such a program.
Lawmakers are trying to rewrite the tax code in days, a process that usually
takes months or years
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