As Senator Elizabeth Warren prepares for Thursday’s Democratic debate, in Houston, she is the first viable contender for the Presidency in decades to have proposed a direct tax on wealth. In January, she unveiled a plan to assess a two-per-cent levy on fortunes greater than fifty million dollars and to tax three cents on every dollar of wealth exceeding a billion dollars. Since then, economists have been debating the proposal’s practicality and desirability. During a conference at the Brookings Institution in Washington last week, some of the main protagonists faced off. Many of the technical issues that they raised were important, but to me the main thing that came across was the groundbreaking nature of Warren’s proposal.
In theory, the United States already taxes wealth—the stock of cash, financial instruments, real estate, equity in private businesses, and consumer durables—through the estate tax. But this levy applies to wealth accumulated over a lifetime, and the high marginal rate on large bequests (currently forty per cent) has prompted a great deal of avoidance (some legal, some illegal) and political opposition. In 2001, a Republican-controlled Congress passed legislation to get rid of the estate tax completely. That law expired in 2010, and the tax was resurrected in an even weaker form. Trump and the G.O.P.’s tax reforms of 2017 further reduced the estate tax’s impact by doubling the exemption threshold.
Rather than trying to eliminate some of the estate tax’s loopholes, which the Obama Administration proposed, Warren put forward a new tax that has the dual political advantages of sounding modest (two cents on the dollar) and, if it works as advertised, bringing in a lot of revenue—$2.75 trillion over ten years, the campaign says. Unlike the estate tax, it would be paid annually and applied to a base—those with the largest fortunes in the country—that has grown enormously over the past four decades, driven by soaring asset prices and a sharp rise in wealth concentration, especially at the very top.
At the Brookings conference, Emmanuel Saez and Gabriel Zucman, two economists from Berkeley who advised Warren on her tax plan, presented a paper in which they estimated that the richest 0.1 per cent of U.S. households (there are about a hundred and seventy-five thousand of them) own about twenty per cent of over-all wealth, compared to less than ten per cent in 1980. In the past forty years, the wealth of the richest four hundred households has quadrupled to 3.5 per cent, Zucman calculated, in a study based on the current and post versions of the Forbes 400 list. This huge accumulation of riches has changed the fiscal calculus. A two-per-cent wealth tax applied to a family’s lifetime savings of a quarter of a million dollars raises five thousand dollars. The same tax applied to a billion-dollar fortune raises twenty million dollars. If it is applied every year for twenty years, it raises four hundred million dollars.
If you do these sorts of sums for every family worth at least fifty million dollars, the revenue adds up quickly. “We can do universal child care for every baby in this country age zero to five—two cents!” Warren said in New Hampshire last weekend. “Universal pre-K for every three year old and four year old in this country—two cents! Raise the wages of every child-care worker and preschool teacher in this country—two cents! We can do all of that, and we can make technical school, community college, and four-year college free for everyone who wants an education—two cents!”
In addition to raising a lot of money—again, assuming it works—the Warren tax would have two more advantages. It would restore some progressiveness to a tax system in which people such as Warren Buffett and Mark Zuckerberg pay a lower effective tax rate than many ordinary families, and, if sustained, it would gradually redress some of the alarming rise in wealth inequality that we’ve witnessed in recent decades.
Two of the charts that Saez and Zucman’s presented illustrate these traits. The first one shows that the current federal tax system is mildly progressive up to the 99.99th percentile of households, who pay an effective rate of thirty-three per cent. But the very richest households—members of the 0.01 per cent—get a break. Indeed, Saez and Zucman estimate that those included in the Forbes 400 list pay an effective tax rate of just twenty-three per cent. The Warren tax would replace this downward kink in the tax schedule at the very top with an upward jag: the richest four hundred households would pay an effective rate of more than forty-five per cent.
Over time, the cumulative effect of the wealth tax would make a big difference in how wealth is distributed, as the second chart shows. “The wealth share of the top 400 has increased from less than 1% in 1982 to almost 3.5% in 2018,” Saez and Zucman noted in the lengthy paper they presented at the conference. “With a moderate wealth tax in place since 1982, their wealth share would have been around 2% in 2018.” According to the authors’ calculations, the impact on some of the very richest people in the country would be even more dramatic. If a version of the Warren tax had been in effect since 1982, Jeff Bezos would be worth $86.8 billion rather than a hundred and sixty billion. Bill Gates would be worth $36.4 billion rather than ninety-seven billion. And Buffett would be worth $29.6 billion rather than $88.3 billion.
In comments on the Saez and Zucman paper, Columbia’s Wojciech Kopczuk and Harvard’s N. Gregory Mankiw, who was the chairman of the White House Council of Economic Advisers under President George W. Bush, both queried whether the Warren tax would work as designed in practice. Kopczuk mentioned the difficulty of valuing privately owned businesses, which many rich people own outright or have stakes in, and he cited other problems, such as avoidance and base erosion, that persuaded a number of European countries to abandon their wealth taxes. Mankiw pointed out that ultra-wealthy couples would have an incentive to get divorced and gift some of their fortunes to their adult children, so each member of the family could obtain the fifty-million dollar exemption. “A married couple with three adult children could, by divorcing and gifting, exempt a total of $250 million from the Warren tax,” Mankiw noted. Over-all, he said, the tax would raise considerably less revenue than Saez and Zucman suggest.
As I noted earlier, these are serious issues, which Saez and Zucman have acknowledged. “History shows that wealth taxes are fragile,” they wrote in their paper. “They can be undermined by tax limits, base erosion, and weak enforcement.” The left could damage the political support for such a tax by lowering the threshold, they added, and the right could weaken its effectiveness by creating loopholes or reducing enforcement, which is what happened to the estate tax. In other words, to be effective, Warren’s wealth tax would need to be vigorously enforced, confined to the ultra-rich, and safeguarded from congressional attacks.
But for all these complications, the arguments for taxing wealth directly remain strong. If you believe, as Barack Obama said in 2013, that rising inequality is the defining issue of our time, you are obliged to try to do something about it. Warren has taken up the challenge, and the enactment of her wealth tax would be a historic step, akin to the introduction of the personal income tax, in 1913. Properly enforced and supported by other measures, such as meaningful campaign-finance reform and an effective antitrust policy, the new tax could help reverse America’s descent into plutocracy. At least, that is the argument that Warren will be making in Houston and beyond.