A brash political candidate forms a presidential exploratory committee. Almost immediately, the candidate announces a controversial policy: a wealth tax on the ultrarich.
Just 1½ pages long, the proposal is met with some cheers but lots of jeers — about its constitutionality, feasibility, fairness. Right-wing pundits bemoan the appeal to class warfare.
Donald Trump, in 1999, pursuing the Reform Party nomination.
Everything old is new again. Last week, Sen. Elizabeth Warren (D-Mass.), now exploring a presidential run, proposed her own wealth tax. Warren’s proposal is constructed differently than Trump’s was — his was a one-time levy, hers is annual — but the reception has been similar.
The case for such a tax has only grown stronger over time, even if the way Warren goes about it could stand to be improved.
Over several decades, U.S. policies have facilitated a systematic upward redistribution of wealth.
Congress has slashed taxes overall, but especially on the rich; reduced or eliminated brackets that applied only to the tippy-top income percentiles, making the tax code less progressive at the top; neutered the estate tax; cut rates on long-term capital gains; added “Inception”-like loopholes within loopholes, which disproportionately benefit taxpayers with the sophistication and resources to game the system; and gutted the Internal Revenue Service, which catches these tax dodgers.
All of these choices — and they were deliberate choices — helped the richest households to accumulate more wealth and make that wealth more persistent across generations.
They have also contributed to the government’s growing revenue shortfall. As Willie Sutton could tell you, if you want to patch deficits, go where the money is — increasingly, at the very top.
While some may see a wealth tax as an attempt to act out the left’s pitchforkiest fantasies, we might instead think of it as a way to correct the mistakes of the past.
It’s hard to unwind 40 years of bad tax policy by jacking up marginal rates on ordinary income alone. The Trump family makes a good poster child for why: Adding a new 70 percent marginal tax rate on income above $10 million, for instance, would barely dent the accumulated wealth passed down — much of it untaxed — from Fred Trump to Donald to Ivanka and subsequent generations.
There are some problems with a straightforward wealth tax, however.
For starters, its constitutionality is unclear, given the requirement that “direct” taxes be apportioned among the states. Some legal scholars, including a group assembled by Warren, argue that a wealth tax would hold up to a constitutional challenge. But with the current Supreme Court, that’s far from guaranteed.
There are other hitches, too, some specific to Warren’s (relatively barebones) formulation: a 2 percent annual tax on a household’s wealth above $50 million, with the rate rising to 3 percent on any wealth above $1 billion. Some obvious ways to game that $50 million threshold trigger include strategic divorce, within-family transfers and tricks for deflating valuations.
Plus, annually enforcing such a system would be an administrative nightmare for the government — and a feast for accountants, tax attorneys and the like. As tax practitioners who’ve appraised large estates could tell you, mark-to-market valuations of highly illiquid assets (closely held businesses, rare works of art) are easily manipulated.
Warren proposes handling this by beefing up tax enforcement, through greater IRS funding, for example. That’s something we should absolutely do anyway, but it’s not clear manpower alone would be enough.
These problems are not insurmountable, however. As tax experts such as University of Chicago law professor Daniel Hemel have suggested, you could reconfigure parts of the income tax to create something that effectively operates like Warren’s wealth tax, except with fewer constitutional or administrative headaches.
Congress could set the tax rate on long-term capital gains to match that of ordinary income. It could shore up the estate tax and repeal the “stepped-up basis” that allows unrealized capital gains to go untaxed when a person dies.
Raising the capital-gains rate might encourage rich people to delay sales of assets. But Congress could claw back these deferral benefits, through something called a retrospective wealth tax. It’s a bit complicated, but it’s like charging interest for the years you held an asset before selling it (or dying). Nobel laureate William Vickrey proposed a version of this 80 years ago, and it has since been tweaked by Alan Auerbach and David Bradford. Despite the name, such a tax could still be administered through the income-tax system, reducing the risk of constitutional challenge.
Other possible iterations are worth considering, too. Let’s hope Warren’s proposal produces at least a vigorous, good-faith debate about the best and fairest ways to redress the policy errors of past generations.