DEMOCRATIC PRESIDENTIAL candidate Sen. Elizabeth Warren (Mass.) plans to propose an annual 2 percent federal tax on individual fortunes of more than $50 million and 3 percent on those greater than $1 billion, according to economists advising her campaign. A lot has to happen before anything like this could ever become law: Ms. Warren would have to (a) get elected; (b) win 60 votes in the Senate; and (c) overcome a likely constitutional challenge. (Depending on how it’s structured, a wealth tax might run afoul of the Constitution’s ban on “direct” taxes that are not levied in proportion to the population of each state.) Such political and legal obstacles aside, would it be a good idea?
Unquestionably, a wealth tax attacks a real issue with real consequences for democratic governance: the high and rising concentration of the nation’s assets in relatively few hands. The wealthiest 1 percent of U.S. households owns 40 percent of the country’s wealth, whereas the bottom 90 percent owns a bit over 20 percent; in 1962, these two groups owned 30 percent each. Much of this wealth belongs to people who got it through inheritance, financial engineering, privileged access to natural resources or other economically unproductive means known to economists as “rent-seeking.” A wealth tax would discourage such behavior.
It is questionable, though, whether a flat annual tax on wealth is the best way to tackle the inequity and inefficiency associated with concentration of wealth. Problems of implementation abound, starting with pricing non-publicly traded assets such as land or rare antiques. The tax would create a huge incentive for tax avoidance among a segment of society well able to afford accountants and lawyers. The authors of the proposed wealth tax would bolster enforcement by charging people worth more than $50 million to renounce their citizenship, which conveys a certain authoritarian odor. This country has prided itself as a destination for immigrants with great ideas for creating wealth, not as a place that bars the exits to anyone, rich or poor.
This country also has recognized that people’s fortunes often result not from rent-seeking, but from socially and economically beneficial activity such as, say, perfecting the personal computer — or writing a delightful children’s novel that becomes a blockbuster movie franchise. A goal should be to reduce inequality without demonizing anyone.
It’s notable that eight of the 12 European countries that had net wealth taxes in 1990 had repealed them as of 2017, according to a 2018 Organization Economic Cooperation and Development (OECD) report. The repealers included such bastions of social democracy as Sweden and Denmark. France joined the list in 2018.
The OECD report suggested an optimal system would target capital income and inheritance of wealth, which could be done here by reducing the current code’s favorable treatment of capital gains and eliminating the huge break for profits on the sale of inherited stock, while putting some teeth back into the estate tax. That would discourage what’s most contrary to American ideals, dynastic wealth accumulation, while encouraging what’s most consistent, getting rich on the merits.