Senator Elizabeth Warren (D-MA) and other progressive lawmakers have introduced a bill that if passed would impose a 2% wealth tax on the 100,000 wealthiest households in the United States.
The proposal was made with the research of progressive economists Emmanuel Saez and Gabriel Zucman of UC Berkeley, who propose that the wealth tax be imposed on households with a fortune over $50 million. If the bill passes, those households would begin paying taxes in 2023 with estimates made in 2022.
An additional 1% would be levied on Americans who posses over $1 billion in wealth, and an additional 1% would be taxed on 100,000 households when, and if, the Medicare for All program is implemented, which would represent a 4% wealth tax on households with more than $1 billion in assets.
According to Saez and Zucman, their wealth tax could raise more than $3.3 trillion for the Federal Treasury in less than 10 years.
Although it is not mentioned in their most recent letter to Senator Warren, economists have also advocated a 40% exit tax on wealth should an investor decide to leave the United States, to discourage capital flight.
The problems with a wealth tax
A wealth tax poses considerable problems from an economic and legal standpoint. For instance, the U.S. Constitution explicitly prohibits Congress from implementing any “Capitation, or other direct, Tax (…) unless in Proportion to the Census or Enumeration herein before directed to be taken,” so there are doubts whether a wealth tax could be implemented or not at the federal level as it would disproportionately affect the wealthier states.
On the other hand, the tax brings other considerable challenges at the economic level as this tax is difficult to collect, difficult to value, and is not as effective in feeding the treasury as European economies experienced more than 20 years ago.
The European experience gives an indication of the ineffectiveness of a wealth tax. In 1990, 12 European countries had some form of wealth tax. 21 years later, only 3 — Norway, Spain, and Switzerland — maintain a wealth tax, but these are far from the 3% tax on the value of all assets that Sen. Warren seeks.
The reasons European countries abandoned the wealth tax were that it disproportionately penalized people with many assets but little liquidity, was costly to administer, distorted savings and investment across the Eurozone, and failed to deliver on collection promises. In France alone between 2000 and 2012, 42,000 millionaires left the country as a result of their wealth taxes. Ultimately, Emmanuel Macron ended the tax.
The problem with a wealth tax is that it starts from the notion that a high capitalization in assets equals a lot of liquidity. Unfortunately for Warren, even if Jeff Bezos is the richest man in the world, his annual salary does not exceed $100,000 so Bezos, in order to meet Warren’s tax, would have to sell a percentage of Amazon to pay for it.
Normally, American families expand their wealth by 5% a year; a 3% wealth tax on wealth would be the equivalent of depriving a normal family of 60% of their annual income. Even assuming that the mega-rich expand their wealth at a faster rate than ordinary American families, it is difficult to think of a wealth that in the long run grows faster than GDP growth.
In other words, this tax would discourage long-term investments with uncertain returns, such as research and development, and incentivize investments that prioritize greater liquidity in the short term, strongly punishing the long-term investor whose portfolio does not generate sufficient returns to pay Warren’s tax.