- Wealth taxes on ultra-wealthy households have been proposed by Democratic presidential candidates to fight against inequality and raise extra revenue but there is substantial uncertainty about how much revenue can be raised.
- Comparing wealth taxes to income taxes shows how seemingly low rates on wealth equate to high income tax rates.
- Wealth taxes in European countries have had disappointing results and many have been phased out.
- A wealth tax would face serious administrative and compliance challenges due to valuation difficulties and tax evasion and avoidance issues.
- Using the Tax Foundation’s wealth tax model, and after factoring in the macroeconomic feedback effects, we estimate that Sen. Elizabeth Warren’s proposal would raise about $2.2 trillion and Sen. Bernie Sanders’ plan would raise $2.6 trillion over the 10-year period from 2020-2029.
- Warren’s wealth tax would reduce long-run GDP by 0.37 percent, while Sanders’ plan would decrease it by 0.43 percent. Given that the model assumes an almost completely open economy with highly efficient international capital markets, the wealth tax also could have dramatic short-run effects—including a more than doubling of the trade deficit.
- A wealth tax would induce foreign inflows of hundreds of billions of dollars a year to replace reductions in U.S. savings, which would cause international investors to replace home-grown billionaires as owners of capital.
Since Democratic presidential hopeful Sen. Elizabeth Warren (D-MA) proposed “The Ultra-Millionaires Tax” in January 2019, the idea of a wealth tax to combat income and wealth inequality has been near the forefront of the policy debate. Both Sen. Warren and fellow presidential candidate Sen. Bernie Sanders (I-VT) have released proposals to tax wealth as part of their 2020 platforms.
Sen. Warren’s original proposal would tax household net wealth above $50 million at a 2 percent rate per year and above $1 billion at a 3 percent rate. Sen. Warren boosted the size of the billionaire’s wealth surcharge to 6 percent from 3 percent when she released her plan to pay for Medicare for All.
In September 2019, Sen. Sanders proposed his version of a wealth tax plan: a 1 percent tax on wealth above $32 million for married couples ($16 million for singles) that increases to 8 percent for wealthier households. Net worth for joint filers between $50 million to $250 million would be taxed at 2 percent, $250 to $500 million at 3 percent, $500 million to $1 billion at 4 percent, $1 billion to $2.5 billion at 5 percent, $2.5 billion to $5 billion at 6 percent, $5 billion to $10 billion at 7 percent, and 8 percent on net wealth over $10 billion.
A wealth tax is just one of many 2020 presidential campaign tax plans with a focus on raising revenue primarily from the rich. Other tax plans include taxing inheritance more heavily,taxing financial transactions, and taxing capital gains as they accrue (also called a “mark-to-market” regime). A wealth tax is unique, however, in that it would impose an entirely new tax structure separate from the current federal income, payroll, estate, and consumption taxes.
Wealth taxes have been imposed in many European countries, but most have been subsequently repealed in recent decades due to difficulties in administration and low efficiency in raising revenue. The proponents of Sen. Warren’s wealth tax claim that European experience is not relevant, and that their design differs from that implemented in European countries. The proposed wealth tax would have a broader asset base with guardrails against tax avoidance from international migration. Nonetheless, the administrative challenges of enforcing an unprecedented wealth tax almost certainly remain…Read more>>