Elizabeth Warren, the Massachusetts senator and Democratic presidential candidate, recently proposed a way to make it easier to fund government programs: a 2 percent tax on all personal net worth in excess of $50 million and a 3 percent tax on net worth in excess of $1 billion.
One estimate has this tax yielding $2.75 trillion of revenue over 10 years. Other Democrats in the presidential race have advocated other wealth taxes as well.
Election season is a great time to vet big ideas. This one should not pass the test. It will not make our tax system more equitable, and it will not raise enough revenue to pay for much.
We all have different ideas about what's fair, but the wealthiest Americans already pay a very large share of the tax burden. According to Pew Research, in 2014, people with incomes above $250,000 per year paid 51.6 percent of all individual U.S. income taxes. The top 0.1 percent of income earners pay 31.1 percent of their income in federal taxes. Those in the bottom 50 percent pay considerably less than 10 percent, and many pay no federal taxes at all.
In a market economy, we earn wealth as a reward for producing something consumers value. Steve Jobs accumulated $8 billion for developing products like iPhones that millions wanted and were willing to pay for. Taxing this wealth means less incentive to serve customers through innovation or lower prices.
The wealthy also pay high tax rates on the income they earn from investing their wealth. A large share of American wealth is invested in capital. Greater capital investment means more business technology and infrastructure, which make workers' time more productive and enable them to earn higher wages.
Additionally, to get through Congress, a new wealth tax would almost certainly be full of the usual loopholes for special interests. After all, members of Congress rely heavily on funding from wealthy donors.
Wealth tax proposals would give 1-percenters less incentive to serve American consumers and more incentive to seek and take advantage of the tax favors politicians dole out. That also means it would raise considerably less money than we might expect.
A number of other high-income countries have tried and abandoned their own wealth taxes; 12 European countries had annual wealth taxes in 1990. All but three have since repealed them for reasons including scant revenue raised, hefty administration costs, reduced economic growth, and an exodus of wealthy individuals and their money.
Looking at the 2 percent wealth tax proposed by French economist Thomas Piketty, the Tax Foundation estimated a 4.2 percent reduction in American wages, a 13 percent reduction in the capital stock, 900,000 jobs lost and a 4.9 percent reduction in GDP. The diminished economic activity leaves only about $20 billion in annual revenue from the wealth tax.
Finally, a tax applied to all kinds of wealth would be difficult to enforce, requiring a large and costly expansion of the IRS. Some assets, like privately held businesses, artwork, and other collectibles, are very difficult to assign a value to.
There's no question that we need to balance the government's books and avoid a future default on our growing debt. A wealth tax is not the best way to do it. Eliminating the loopholes in our current income tax system and cutting government spending might not excite the electorate, but that would boost economic growth while reducing deficits.
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Tracy C. Miller is a senior policy research editor with the Mercatus Center at George Mason University.
Editorial on 09/09/2019