Remember when then-presidential hopefuls Bernie Sanders and Elizabeth Warren made wealth taxes key parts of their campaigns for the Democratic presidential nomination? That seems so long ago now that tax increases have taken a backseat to assisting people during this historic COVID-19 pandemic.
Still, I look forward to the day when the economy is strong enough that we can worry about the gigantic debt left behind by federal relief and recovery efforts. At which point, we will see a resurgence of interest in a wealth tax.
Actually, Emmanuel Saez and Gabriel Zucman—the most prominent academic advocates of wealth taxes—already are calling for the creation of a wealth tax to fund Europe’s COVID-19 response.
Much more surprising is the reversal by the editorial board of the Financial Times, the voice of the British economic establishment. Its position in November (paywall): “Taxing wealth should be a last resort.” In April, the FT wrote (paywall), “…the virus, the economic lockdowns needed to combat it, also shine a glaring light on existing inequalities—and even create new ones.” To pay for pandemic programs, they conclude, “wealth taxes will have to be in the mix.”
Indeed, the COVID-19 pandemic and its economic aftershocks shine a glaring light on existing and new inequalities, hitting hardest the people with pre-existing health conditions; people laid off from often low-wage jobs in restaurants, hair salons, and retail stores; and essential workers—nursing home aides, grocery workers, and bus drivers—whose jobs place them at high risk of infection. Disproportionately, those effects are borne by African-Americans and Hispanics.
I never bought into Saez and Zucman’s argument that a wealth tax would prevent the rise of an oligarchy. Even at Sanders’s and Warren’s very high (and at some levels, confiscatory) tax rates, the very rich and powerful would still be very rich and powerful. And wealth taxes would be a challenge to implement and maintain.
But wealth taxes could also raise a lot of dough from a very small number of taxpayers.
Before the pandemic, the Tax Policy Center estimated that Sanders’s proposal to tax net wealth at rates ranging from 1 percent to 8 percent would raise nearly $2.3 trillion over ten years. Compare that figure to estimates of two options found in the Congressional Budget Office’s report, Options for Reducing the Deficit: 2019 to 2028. One option—a 5 percent value-added tax (VAT), with exemptions for subsistence items like food and health care—was estimated to yield $1.9 trillion over a 10-year period. A $25 per metric ton tax on most emissions of greenhouse gases would increase revenues by an estimated $1.1 trillion over 10 years (before rebates).
Another perspective: Sanders’s wealth tax would have, over a decade, nearly paid for all four of the COVID-19 relief bills enacted by Congress in March and April.
Yet, high as it is, TPC’s estimate of revenue generated by the Sanders wealth tax is roughly half of Saez’s and Zucman’s. Why? We estimate that people would report much less of their actual wealth to the Internal Revenue Service than the Berkeley economists do. And, unlike them, we assume that avoidance and evasion would increase with the tax rate and grow over time as creative tax lawyers find new ways to help their rich clients minimize their reported wealth. TPC also goes a step further and anticipates that reported capital income—and thus individual income taxes—also fall when reported wealth declines.
In addition, neither TPC nor Saez and Zucman account for the time and money it would take the government to successfully implement a tax that is fundamentally different than any the United States currently has. The IRS would have to develop new appraisal and reporting systems, hire and train examiners, and write rules and regulations before the revenues roll in.
VATs and carbon taxes—revenue sources preferred by some of my TPC colleagues—also don’t happen overnight, and the two budget options in the CBO report generally don’t account for those implementation lags either.
When the bills come due for the costs of COVID-19 relief programs, an income tax surcharge on high-income households could be quickly implemented but won’t be enough. My colleague, Howard Gleckman, offers a menu of other revenue-raisers—some that could be applied quickly and some that would require more time to implement.
But don’t be surprised if wealth taxes are in the mix. They may not raise as much money as their advocates claim, but they will raise a lot of money at a time when federal budget deficits will reach levels unseen since World War II.
The Financial Times editors remind us that FDR and Churchill initiated planning for the post-war economies even as World War II raged. The lesson, according to the editors: “Beyond the public health war, true leaders will mobilise now to win the peace.” Wise advice, especially when fundamental tax changes will be needed.
