Here’s the plan, which, for the record, is extremely simple to explain, an advantage when it comes to tax policy: Wealth over $50 million would be taxed at 2 percent; wealth over $1 billion would face an extra 1 percent tax. “Wealth” is defined as net worth — the value of assets minus any debts.
That’s it. It is projected that the tax would raise about $2.75 trillion in revenue over 10 years. To get a sense of that magnitude, recall that the Trump tax cuts lost less revenue (just under $2 trillion) than this tax allegedly gains. That’s a lot of tax progressivity pushing back on the highly regressive Trump cuts.
According to wealth scholars Emmanuel Saez and Gabriel Zucman (S&Z), less than 0.1 percent of households (the top tenth of the top 1 percent), about 75,000 of them, would face this new tax, which raises the question: How could such a small tax on such a tiny base raise so much money? The answer speaks to the extent of wealth concentration.
S&Z find that since the 1970s, the share of total wealth held by the top 0.1 percent grew by a factor of almost three, from 7 percent in the late 1970s to 20 percent in recent years. Moreover, the top’s gain has been everyone else’s loss: The bottom 90 percent of households have gone from holding 35 percent of wealth in the 1970s to 25 percent today. In other words, the top 0.1 percent’s wealth holdings aren’t that much less than those of the bottom 90 percent.
It’s notable in this context that wealth tends to be about twice as concentrated as income, in part because it feeds on itself. The “miracle of compounding” is a tremendous force for those sitting on a large pile of large assets. It’s also terribly skewed away from minorities. As Valerie Wilson has shown, the black/white median income ratio is about 60 percent. For net worth, it’s 10 percent.
Narrowing the scope within the top 0.1 percent to the 75,000 households with net worth above $50 million yields a base of more than $9 trillion, of which about $2.5 trillion would face the billionaire’s surcharge of an extra 1 percent. In other words, the small tax delivers a large revenue payload because there’s so much wealth concentrated in that rarefied bit of the stratosphere.
The plan’s $2.75 trillion score implies the ability to capture a lot of wealth that’s sheltered from taxation, so it must be robust to tax avoidance and evasion, of which there’s a lot among this crowd (remember the “Panama Papers”?). One important feature in this regard is that no assets are given favorable treatment: All the assets of households above the threshold are included in the net worth measurement, regardless of where in the world such assets reside.
To meet this goal, the plan includes a significant increase in the Internal Revenue Service’s enforcement budget, a minimum audit rate for the wealthiest taxpayers, a 40 percent “exit tax” on those above the $50 million threshold who renounce their citizenship and — among the most important parts of this — anti-evasion mechanisms to share information with foreign governments. Still, these are folks with the best tax lawyers money can buy, so the score assumes that households subject to the tax find ways to reduce their liability by 15 percent.
All that said, as S&Z themselves recently pointed out in a must-read commentary, revenue isn’t the only rationale for such progressive taxation. It’s also about “regulating inequality and the market economy” and, even more so, “safeguarding democracy against oligarchy.” In that context, they make two critical points. First, top U.S. tax rates are much lower than they’ve ever been in our history, and, second, despite fact-free rhetoric to the contrary, there’s no negative growth impact from high top rates, either here or in other advanced economies.
Still, you can be sure we’ll hear massive sob stories about how the Warren high-net-worth tax will crush capital investment. Don’t believe it, for at least three reasons. First, the historical record fails to show a correlation between changes in taxes, including those on capital gains (income derived from wealth) and business investment. Second, the Trump tax cuts, which were explicitly targeted at investment, have very little to show for it. Third, even if there were a negative effect, we’re talking about tax rates of 2 percent or 3 percent, so any such “elasticity” would be barely tweaked by this tax.
S&Z’s sage warnings on inequality and oligarchy raise what is perhaps the most important attribute of this idea: the taxation of wealth, something we do almost none of in this country. Especially when it comes to the rich and their contemporary portfolios, this makes no sense. We tax income, of course, but for the wealthy, income streams flow from wealth in the form of interest, dividends and capital gains. True, we tax those forms of incomes, but at favorable rates, privileging wealth-derived income over work-derived income. In fact, S&Z find that the Warren tax would raise taxes paid by the wealthiest households as a share of net worth from 3.2 percent to 4.3 percent, compared with 7.2 percent for households in the bottom 99 percent. One way to further close the remaining regressive gap between those rates would be to lower the threshold of the plan from $50 million to something like $20 million or $30 million.
But perhaps the main reason to bring Warren’s plan to fruition is because, as Zucman writes, “For the rich, wealth begets power.” This is especially the case in our pay-to-play politics, where the high wealth concentrations documented above buy the policies that block ideas just like this one.
In other words, to give Warren the last word, the economy — more precisely, the tax code — is rigged. True, this plan isn’t going to become law anytime too soon, but those of us longing to de-rig the economy are in it for the long haul. So, thanks, Senator, for providing us with an inspiring idea whose time has come.