In response to Sen. Elizabeth Warren’s wealth tax plan — and a similar proposal by Sen. Bernie Sanders — pundits have come out in force to argue that a progressive tax on the wealth of the ultrarich is destined to fail. Warren (D-Mass.) has proposed to tax wealth above $50 million at a 2 percent rate and wealth above $1 billion at 3 percent; the plan from Sanders (I-Vt.) would impose somewhat higher rates on the extremely moneyed, reaching 8 percent for wealth over $10 billion. To bolster their case, the skeptics point to Europe’s experience with wealth taxation, casting it as a debacle that predicts failure on this side of the Atlantic, too. In 1990, 12 affluent nations in the Organization for Economic Cooperation and Development had wealth taxes; today it’s down to three. France, Germany and Sweden are among the countries that abandoned them.

For the skeptics, the case pretty much ends there. The tax was abolished? That means it was unworkable. Even “the most egalitarian European societies” have “moved away in droves from far less ambitious wealth taxes” than those Democrats are debating, the Harvard economist Lawrence Summers and Penn law professor Natasha Sarin wrote in The Washington Post. “Most … countries that implemented [a wealth tax] in the ’90s have taken it off the books,” observed Liz Peek, a Fox News contributor and former Wall Street analyst. (No matter that France, Germany and Sweden removed such taxes under conservative governments, which typically oppose taxes of this sort.)

But this interpretation of the European experience is superficial. Taxes are bound neither to fail nor to succeed: Governments can choose to make them work or allow them to fail, and European governments made wrong choices, letting tax avoidance fester. The taxes envisioned by Warren and Sanders — which we helped design — could be rendered largely immune to the problems that undermined wealth taxation abroad. In other words, the United States is in a good position to make this work.

AD
AD

To understand why requires delving into the reality of how wealth was (and in Norway, Switzerland and Spain, still is) taxed in Europe. Although there were some differences across countries, the failed attempts share three distinctive, preventable flaws. 

First, Europe tolerates tax competition. A tax-averse Parisian just needs to move to Brussels to become immediately free from taxation in France; his friends remain a 90-minute train ride away. The European Union has never restricted tax competition: Any common tax policy requires the unanimity of all member states, which makes such a policy extraordinarily unlikely. What’s more, E.U. member states don’t try to tax their nationals living abroad.

Tax competition was probably sufficient to kill European wealth taxes on its own. Sweden’s richest man, Ikea founder Ingvar Kamprad, left that country in the early 1970s to escape its wealth tax, only returning in 2014. (Sweden dropped the tax in 2007.) In France, Emmanuel Macron’s government stressed the threat of expatriation in abolishing the wealth tax. 

AD
AD

The situation in the United States is different. You can’t shirk your tax responsibilities by moving, because U.S. citizens are responsible to the Internal Revenue Service no matter where they live. The only way to escape the IRS is to renounce citizenship, an extreme move that in both Warren’s and Sanders’s plans would trigger a large exit tax of 40 percent on net worth.

Europeans also tolerated tax evasion to a foolish degree. Until January 2018, the E.U. did not require banks in Switzerland (and other tax havens) to share information with national tax authorities, which made hiding assets child’s play. A recent study , based on leaks from offshore banks (the “Swiss Leaks” from HSBC Switzerland and the Panama Papers), found that in 2007, the wealthiest Scandinavians evaded close to 20 percent of their taxes through hidden offshore accounts. 

The United States has been more aggressive on this front. In 2010, President Barack Obama signed into law the Foreign Account Tax Compliance Act, which compels foreign financial institutions to send detailed information to the IRS about the accounts of U.S. citizens each year, or face sanctions. Almost all foreign banks have agreed to cooperate. Due to its current underfunding, the agency is not exploiting this information as much as it could, but both the Warren and Sanders plans come with extra funding for the agency. 

AD
AD

The European wealth taxes also included myriad exemptions, deductions and other breaks that the Warren and Sanders plans forgo. Consider the French program that was in place from 1988 to 2017. Paintings? Exempt. Businesses owned by their managers? Exempt. Main homes? Wealthy French received a 30 percent deduction on those. Shares in small or medium-size enterprises got a 75 percent exemption. The list of tax breaks for the wealthy grew year after year.

According to some commentators, any U.S. wealth tax would inevitably develop similar loopholes, even if it didn’t start off with them. But one reason such deductions were deemed politically necessary in Europe is that wealth taxes fell on a much broader population than those proposed here. In Warren’s plan, recall, all net wealth below $50 million is exempted; in the Sanders version, the exemption is $32 million. In Europe, wealth taxes have tended to start around $1 million, meaning they hit about 2 percent of the population, compared with about 0.1 percent for the proposed U.S. plans. 

In Europe, then, the “merely rich” (as opposed to the super-rich) owners of fairly valuable houses and smallish businesses lobbied for exemptions from the wealth tax, claiming that they faced liquidity constraints: Their money was tied up in their houses or businesses. In some cases, this might have even been true. But the notion that someone worth $100 million doesn’t have enough cash on hand to pay a $1 million tax, the bill that would be due under Warren’s plan, is self-evidently absurd, and it’s hard to imagine the argument developing any political support.

AD
AD

We recently calculated that, considering all taxes at all levels of government, the richest 400 Americans pay 23 percent of their income in taxes, a lower rate than the working and middle classes pay. Tax dodging is not a law of nature, an unchangeable fate that dooms tax justice. In Europe, a choice was made to let wealth taxes fail rather than to shore up their weaknesses. It may not have been a conscious or democratic choice, the product of a rational deliberation by an informed citizenry, but it was a choice nonetheless. We needn’t make the same one, and the European experience suggests we shouldn’t.

Twitter: @gabriel_zucman

saez@econ.berkeley.edu

AD
AD