How Would a Wealth Tax Work, Anyway?

Can a Wealth Tax Even Work? [NPR] If a Wealth Tax is Such a Good Idea, Why Did Europe Kill Theirs? --------------------------------------------------------------- by Greg Rosalsky In late January, Senator Elizabeth Warren, who’s in the race to become president in 2020, added a new kind of tax to the American conversation, causing anxious pacing on superyachts in every port: a wealth tax. It’s a cousin of the property tax, but it encompasses all forms of wealth: cash, stocks, jewelry, thoroughbred horses, jets, everything. Warren calls the policy her “Ultra-Millionaire Tax.” It would impose a 2% federal tax on every dollar of a person’s net worth over $50 million and an additional 1% tax on every dollar in net worth over $1 billion. [Economists estimate]( it would hit the 75,000 richest households and raise $2.75 trillion over ten years. It’s a direct attack on wealth inequality, and it’s influenced by the work of French economist Thomas Piketty, whose book [Capital in the Twenty-First Century]( put a spotlight on the increasing disparity of wealth in developed nations. Warren, who informally endorsed a wealth tax while at [an event with Piketty]( in 2015, is the first U.S. presidential candidate to take up the cause. Mario Tama / Getty Images The disparity in what Americans own is much greater than the disparity in what they earn. Jeff Bezos has a net worth of $135 billion, but his formal salary is [less than $100,000 per year](. Warren’s proposal aims to tap the fortunes of the ultra-rich and use the proceeds to fund social programs. But a wealth tax faces serious hurdles, including lessons from a failed experiment in Europe, the need for significant bureaucratic expansion, and serious questions over whether it’s even constitutional. Euro Flop Normally progressives like to point to Europe for policy success. Not this time. The experiment with the wealth tax in Europe was a failure in many countries. France’s wealth tax contributed to the [exodus]( of an estimated [42,000 millionaires]( between 2000 and 2012, among other problems. Only last year, French president Emmanuel Macron [killed it](. In 1990, twelve countries in Europe had a wealth tax. Today, there are only three: Norway, Spain, and Switzerland. According to reports by [the OECD]( and [others]( there were some clear themes with the policy: it was expensive to administer, it was hard on people with lots of assets but little cash, it distorted saving and investment decisions, it pushed the rich and their money out of the taxing countries—and, perhaps worst of all, it didn’t raise much revenue. UC Berkeley economist Gabriel Zucman, whose [research]( helped put wealth inequality back on the American policy agenda, played a part in designing Warren’s wealth tax. He says it was designed explicitly with European failures in mind. He argues the Warren plan is “very different than any wealth tax that has existed anywhere in the world.” Unlike in the European Union, it’s impossible to freely move to another country or state to escape national taxes. Existing U.S. law also taxes citizens wherever they are, so even if they do sail to a tax haven in the Caribbean, they’re still on the hook. On top of that, Warren’s plan includes an “[exit tax]( which would confiscate 40 percent of all a person’s wealth over $50 million if they renounce their citizenship. Warren’s tax is also only limited to the super rich, whereas in Europe the threshold was low enough to also hit the sort-of rich. This higher threshold helps it avoid problems like someone having a family business that makes them look rich on paper but, in fact, they’re short on the cash needed to pay the tax. Also important, Zucman argues, the higher threshold means only a small group will be affected. And smaller groups have a harder time fighting for exemptions, which hurt European efforts. Some countries, for example, [exempted artwork and antiques]( on the grounds they were hard to value. It’s true, but it creates a huge loophole: Buy lots of art! Economists hate incentives like these because they distort markets. Warren’s proposal calls for no exemptions. Bureaucracy and the Constitution But having no exemptions means the U.S. government will have to get very good at valuing art, diamonds, superyachts, and all the other fabulous things the super rich collect. Indeed, [Warren’s plan]( includes a call for “a significant increase in the IRS enforcement budget.” It was the hefty cost of enforcement that played a big part in Austria killing their wealth tax [back in 1993](. It turns out it costs a lot to track and value rich people’s stuff every year. And a wealth tax may not even be legal. The ability of the federal government to tax is tightly curtailed by the U.S. Constitution. Legally imposing the first income tax in 1913 required a [constitutional amendment](. Legal scholars [are currently debating]( whether a wealth tax would need another amendment. The debate, [Josh Barro writes]( centers on whether a wealth tax would be a “direct tax,” which the Constitution makes really hard for the federal government to impose. While the legality of a federal wealth tax is in question, the current politics of it are not. A [new poll]( finds that even a majority of Republicans support Warren’s wealth tax. It turns out President Trump himself [once advocated for one]( too. A Local Problem with a Global Solution It’s been roughly five years since Piketty published [Capital in the Twenty-First Century](. One of the book’s central arguments was that the rate of return on capital will grow at a faster rate than economic growth ("r>g") and, as a result, the wealthy will continue seeing their fortunes increase faster than everyone else’s. His solution was a wealth tax, but he recognized that exemptions and freedom of travel had doomed the European experiments. So he suggested a global wealth tax: The whole world would decide to do one thing at one rate. That such a solution is highly unlikely is a perfect symbol for the difficulty of getting money from people with the best accountants, the best lobbyists, and the best boats. On Our Podcasts --------------------------------------------------------------- Antitrust 2: The Paradox and Antitrust 3: Big Tech — Planet Money finishes its three-part series about the fight over how to regulate big companies. [Listen here]( and [here](. Why Americans Can't Quit Tipping — The Indicator explores why tipping long befuddled economists and how the field has come to understand why we do it. [Listen here](. What We're Learning --------------------------------------------------------------- NPR reporter Jasmine Garsd [recently reported]( on how the Trump administration’s policies are affecting Gilroy, California, which calls itself the “the garlic capital of the world.” Tariffs have helped sell garlic, making growers happy, but a crackdown on undocumented labor is also making life hard for them. --------------------------------------------------------------- What do you think of today's email? We'd love to hear your thoughts, questions and feedback: [planetmoney@npr.org](mailto:planetmoney@npr.org?subject=Newsletter%20Feedback) Enjoying this newsletter? Forward to a friend! They can [sign up here](. Looking for more great content? [Check out all of our newsletter offerings]( — including Daily News, Politics, Health and more! You received this message because you're subscribed to our Planet Money emails. | [Unsubscribe]( | [Privacy Policy]( | NPR 1111 N. CAPITOL ST. NE WASHINGTON DC 20002 [NPR]