At the Tax Policy Center’s conference on inequality and taxes last week, there was little disagreement about one conclusion: Wealth inequality in the US is a big and growing problem. But there was no consensus among the economists, political scientists, and others on what to do about it. And the fix that has generated the most attention this election season—a tax on the wealth of the richest Americans—got little love.
Not only would a tax on the assets of the super-wealthy create administrative complexity, but it also may result in a number of unanticipated consequences. And it is unlikely to achieve a key stated goal of some of its leading proponents—to reduce the political influence of the rich.
A wealth tax may indeed make the rich less so. But would it diminish their clout? For example, Amazon founder Jeff Bezos reportedly is worth $115 billion. In the unlikely event Congress enacted a tax that cut his wealth in half, would Bezos be half as influential as he is today? As it happens, Michael Bloomberg reportedly is worth about $60 billion—half as much as Bezos. And his political influence seems quite robust.
Wealth and political influence
That doesn’t dismiss concerns about the outsized influence of the wealthy. At the conference, Northwestern University political scientist Ben Page said his research leads to an unambiguous conclusion: “In the US, money leads to political influence. High-income people get their way.” More than that, Page added that the very sorts of public policy the wealthy pursue may serve to enhance their wealth.
But even if Page is right, it doesn’t follow that reducing the wealth of the super-rich necessarily would diminish their influence. There are two reasons:
First, relative wealth may be more important than absolute wealth. Assume you buy the argument that Bezos has more influence than me because he has so much money to spend on advocacy. Even if a wealth tax trims his assets, he still will have more money than me. And thus more influence.
Second, political influence often is about more than wealth, whether absolute or relative. It may be driven by personality, social status, personal connections, and or just a willingness to engage in advocacy.
Car dealers v. billionaires
Harvard economist Jason Furman, who advised presidents Clinton and Obama, wondered aloud at the TPC event whether, for instance, auto dealers and community bankers—located in every congressional district—are more influential than the super-rich. As Jason noted, car dealers may be wealthy, but most likely would be exempt from the wealth taxes proposed by Democratic presidential hopefuls Bernie Sanders or Elizabeth Warren. For instance, Sanders’s tax would kick in at $32 million for joint filers.
Perversely, as I noted in a blog last October, a wealth tax could even increase political advocacy among the very rich. They could, for instance, reduce their taxable wealth by spending more on candidate contributions or gifts to policy-oriented non-profits.
The wealth tax may have unintended economic consequences as well.
For example, a tax at the rates proposed by Sanders and Warren would tax most—or even all—of the normal returns to capital. For example, a 4 percent wealth tax on a 4 percent return on an investment would be equivalent to a 100 percent income tax rate. But investment returns above the wealth tax rate—say the higher profits a business owner makes from monopoly pricing power—would be exempt from the levy. It seems unlikely that wealth tax supporters would prefer such a result.
The burden on workers
Another panelist, Doug Holtz-Eakin of the American Action Forum (AAF), cited a study his group funded that concluded as much as 60 percent of the burden of a wealth tax would fall on workers. The reason? Wealthy business owners would have less money to invest, so their employees would have less capital to work with, resulting in lower wages than if there were no wealth tax.
Others, including Chye-Ching Huang of the Center on Budget and Policy Priorities, strongly disagreed with AAF’s evaluation of the size of the effect on wages. But even if AAF’s estimate is far too high, its basic point is worth noting: At least some of the burden of a wealth tax could fall on workers—another result that supporters of the levy would not like.
For these and other reasons, most panelists agreed that while the rich do have outsized influence, the solution is more likely to lie in broader political reform than in a new tax. And even if taxes are part of the solution, a wealth tax may not be the answer.
