Forget high income taxes, Elizabeth Warren and Bernie Sanders are going after the farm too.
No tax is too much for the duo, including one that some legal experts believe may be unconstitutional; a wealth tax. Warren wants a wealth tax of 2% on all net wealth above $50 million, and 3% on wealth over $1 billion. Few would be affected, only the wealthiest 0.05% (or 75,000 households). The Sanders plan would kick in at fortunes over $32 million, taxing them at 1%, which would be ratcheted up to an 8% tax on assets above $10 billion.
The proposal serve two political ends – to combat wealth inequality, and to give the illusion that this will disproportionately aid in funding the countless new social programs they both propose.
Warren estimates claims her plan would bring $2.75 trillion into the treasury’s coffers over the next 10 years, while Sanders says his tax would yield $4.35 trillion over the next 10 years. That’s doubtful, as a recently study from economists at the Treasury Department, University of Chicago, and Princeton University found that Warren’s overestimates the amount of wealth that would be subject to this kind of tax by about a third. A Tax Foundation study found that it would raise revenues by just $62.6 billion a year.
It sounds like a great idea – taxing those who can afford it most – but in reality, it’s an incredibly inefficient way to tax the rich. Twelve European countries have wealth taxes in 1990, yet today only three remain (in Norway, Spain, and Switzerland), with those taxes accounting from as much as 3.62% of total revenues in Switzerland to only 0.55% in Spain. Why those nine European countries ditched their wealth taxes is a case study in why they’re a horribly inefficient way to extract revenue from the top, And Europe’s taxes didn’t just affect the ultra-rich, but the ordinary rich as well.
France implemented their wealth tax in 1982, and repealed it recently in 2017. Upon repealing the tax in 2017 the French government estimated in that “some 10,000 people with 35 billion euros worth of assets left in the past 15 years” due to the tax.
French economist Eric Pichet painted an even starker picture, estimating that 42,000 French millionaires left the country between 2000 and 2012. He estimates that 200 billion in capital fled the country during the first ten years of implementation alone.
Pichet also found that the tax failed the cost-benefit test, raising only 3.6 billion euros a year while costing the economy seven billion euros billion a year due to fraud and capital flight.
Sweden, Germany, the Netherlands, and Austria
Sweden has one of the most regressive tax systems in the world, and their wealth tax fit that theme, affecting households with over the equivalent of only $200,000 in wealth with a 1.5% tax. Even kicking in at such a relatively low level, the Financial Times noted in light of its repeal “The move will have virtually no effect on government finances. The tax raises around 4.5 billion Swedish krona a year from just 2.5 per cent of all tax payers, but it has been blamed for years of massive capital flight from the country estimated at up to 1.5 trillion krona.”
Sweden cited the high cost of enforcement for relatively little revenue as the primary reason for abolishing their wealth taxes – as did Germany, the Netherlands, and Austria.
Enforcement and Loopholes
One great difficulty in enforcing a wealth tax comes primarily from the often subjective nature of wealth. How do we tax someone whose wealth is tied up in the form of private stock in a highly valued Silicon Valley startup? Or how do we value someone with an immense amount of wealth held in the form of highly illiquid high-end art? Do we actually expect the IRS to correctly value every single individual asset someone has?
One also must bear in mind that some assets will inevitably be exempted from the wealth tax – which will incentivize the wealthy to shift assets into those exempt assets, creating economic distortions. As the National Review’s Chris Edwards noted, “In Europe, politicians carved out an increasing number of exemptions from tax bases to appease special interests. Exemptions were often provided for farm assets, small businesses, pension assets, artwork, and other items. And here’s the kicker: Since the base of wealth taxes is net wealth, debt is deductible. That allowed wealthy Europeans to jack up their borrowing and invest in the exempted assets to shrink their tax bases.”
And what if someone simply leaves the country? Warren proposes a 40% exit tax for that – and we’ll wish her luck on somehow collecting that.
There’s no shortage of ways to raise taxes on the rich that are simple to enforce and harder to evade, the most obvious of which would be to cap or eliminate certain deductions. So why do Warren and Sanders want to tax wealth? Because they’re not choosing their economics based on facts, but on envy.