Meanwhile, looking through the other end of the Washington kaleidoscope makes staggering sums seem rather dainty to the unpracticed eye. Take, for example, Sen. Elizabeth Warren’s proposed wealth taxes. In their current iteration, the Massachusetts Democrat’s plans would have the government take 2 percent of all wealth above $50 million, and 6 percent of all wealth over $1 billion. Her supporters are fond of saying “Two cents!” (on every dollar), which sounds like nothing so much as . . . nothing. I mean, two cents won’t even buy you a penny candy any more.
Six cents is three times that of course, but still, what is six cents? Most people would dump that in the “give a penny, take a penny” jar if they got it back as change. Billionaires who have greatly benefited from living in the biggest rich country in the world sound a wee bit ungrateful complaining about such a trivial sum.
But of course, six cents on every dollar taken out every year would be an enormous chunk of their wealth. Estimates from two of the economists who advised Warren on her wealth tax found that if the tax had gone into effect in 1982, famous billionaires such as Bill Gates, Michael Bloomberg and Warren Buffett would have lost most of their fortunes by now.
In fact, this analysis actually understates the scale of the decline, because it excluded many of Warren’s other taxes on capital income. There’s a 14.8 percent Social Security tax on net investment income for everyone making more than $250,000 a year ($400,000 for a married couple). Plus the top 1 percent of households would have to pay capital gains taxes every year, at the same rate as their wage and salary income, instead of paying a reduced rate when they sold the asset.
If we run those numbers for someone worth $10 billion, and earning the 8 percent historical average return for an S&P 500 index fund, we find that our hypothetical billionaire would have made about $800 million over the course of the year. They would then owe a wealth tax of roughly $600 million. But they would also have to pay taxes on their unrealized capital gains, and since those gains would be taxed as regular income, that means they’d owe about $300 million. On top of that, they’d have to make that Social Security contribution, which would add another $120 million in taxes. All in all, they’d end the year about $200 million poorer than they started.
And so what, one might ask. They’d still be fabulously rich. And if compounding of the taxes over decades eventually reduced them to centimillionaires, aww, boo hoo, you have to scrape by on $1 billion.
And perhaps that’s the whole point of the tax. But if so, you cannot then claim, as Warren does, that you’ll use this tax to fund significant new spending. In our hypothetical example, after five years of perfectly steady 8 percent returns, the billionaire tax base would have declined by 10 percent. No important program should depend on a revenue source that is — by design — going to shrink so quickly.
Nor is that the only area where funding problems would arise. Such high capital gains taxes would effectively bar wealthy Americans from buying U.S. Treasury debt, which is yielding between 1.5 percent and 2.5 percent, far too little to keep them even with the tax man. The abrupt and simultaneous exit of all the nation’s rich people from the Treasury market would mean at least one of two things: Either interest rates would have to rise to entice them back, or we’d become even more dependent on foreign money to fund government operations. Quite possibly, we’d see both.
Maybe you think that would be a small price to pay for shrinking the gaps between the ultrarich and the rest of us. And maybe you’d be right. But no matter how you squint, you cannot make those numbers look small — or fail to notice that enormous economic disruption must inevitably follow.