We have the means to tax the assets of the super-rich, and it is high time we did so, especially when faced with inequality that rivals the Gilded Age.
Ever since Senator Elizabeth Warren (D-MA) introduced her proposed wealth tax, there has been a storm of criticism against it not just from predictable sources like the Tax Foundation or Fortune magazine, but also from Democrats like former Secretary of the Treasury Larry Summers. This criticism is misguided and should not prevent other Democrats from supporting Senator Warren’s proposal.
Under Warren’s wealth tax plan, the richest 75,000 American households would pay an annual 2 percent tax on all assets—net worth—above $50 million, and a 3 percent tax on every dollar of net worth above $1 billion. University of California, Berkeley, economists Gabriel Zucman and Emmanuel Saez, who study wealth inequality, say Warren’s tax would raise around $2.75 trillion over ten years. The revenue would be used to fund, among other things, universal child care for every child age zero to five, free tuition and fees for all public colleges, and forgiveness of 95 percent of student debt.
There are four major lines of criticism of the Warren proposal, and they are all wrong.
First, opponents have argued that based on the U.S. experience with the estate tax and European experiences with wealth taxes, the revenue estimates are too high. But the estate tax is notoriously loophole-ridden, whereas Senator Warren’s wealth tax has robust anti-avoidance features (and assumes a 15 percent avoidance rate). As for Europe, under European Union law European countries cannot prevent their rich citizens from moving themselves or their wealth to other European countries. The U.S. has taxed such expatriations since 2008, and because of tough laws enacted in 2010, is in a much better position to discover its rich citizens’ offshore assets than any other country.
Second, opponents have argued that some assets are too hard to value and track down. But the largest asset of the ultrarich in today’s society is not real estate or artworks, but stock in publicly traded corporations, often corporations that they have founded. Just taxing Messrs. Bezos, Brin, Page, and Zuckerberg on the untaxed value of their stock will bring in billions every year. The vast majority of wealth subject to the tax is in such financial assets; the owners of those assets are known to the SEC. One overdue, complementary reform would require identification of true beneficial owners of stock and prohibit the use of straws as illegal tax evasion. The tax would bring in trillions even if it completely exempts art or real estate.
Third, opponents have argued that a wealth tax is unconstitutional because it is a “direct” tax (which the federal government may not levy). Alexander Hamilton would have disagreed, since he imposed the first federal wealth tax on carriages and saw it upheld in 1796 by a unanimous Supreme Court, all of whose members were drafters of the Constitution. Whatever a “direct” tax is, it does not preclude taxing wealth.
Finally, opponents say that lesser measures such as raising the capital gains rate and eliminating tax-free transfers of property at death would have the same effect. But as long as we do not tax all increases in value as they occur (a much harder task than taxing wealth), we cannot raise the capital gains rate too much or we will deter sales. As for eliminating tax-free transfers, death by definition only happens once, whereas a wealth tax would be imposed every year. The super-rich all envisage shifting their wealth to tax-free foundations before they die, which is why we should tax them now while they are young. Besides, there is no reason why we should not have both a wealth tax and an improved income tax with no tax-free transfers at death.
The income tax was adopted over a century ago because state property taxes could not reach intangible assets like stocks and bonds, and federal consumption taxes (tariffs) were regressive. Today, we have the means to tax the super-rich on these assets, and it is high time we did so, especially when faced with inequality that rivals the Gilded Age and a president who cuts taxes on the rich and imposes tariffs on the poor. Senator Warren’s plan should be adopted, even if it fails to tax those Rembrandts.