At long last, some Democrats are proposing ways to fund the wide array of social programs they’d like implemented in America as part of their “cradle to grave” vision for government. The democratic-socialist darling Alexandria Ocasio Cortez has been smart enough to phrase her proposals in Robin Hood terms, calling for a 70% tax rate for all incomes above $10 million. There are plenty of millionaires who fit that criteria – over 16,000 in the U.S. – with $245 billion in taxable income above the $10 million thresholds, or 1% of GDP.

While it would require the equivalent of 20% of GDP to fund all the social programs Cortez desires, taxing all income above “only” $1 million at 100% (assuming everyone continues working the same amount) would raise “only” 3.8% of GDP. There simply aren’t enough wealthy people to fund what Ocasio desires, as her 70% tax would only raise between $16.4 billion and $38 billion a year.

Certainly, those like Cortez must know better. In one breath she (and others like her, such as Bernie Sanders) cite the Scandinavian countries as successful examples of socialism but never mention that it’s the middle class paying 50%+ tax rates there. She knows just as every other politician does that if you want to sell a tax hike to the American public, you don’t want them believing it’ll apply to them personally. The only liberals who seem to be aware of this are the ones that Democrats would rather not run for President (such as Howard Schultz and Michael Bloomberg).

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Elizabeth Warren has become the latest to hop on the “soak the rich” bandwagon ahead of the 2020 election cycle, proposing an annual 2% wealth tax on households with net worths exceeding $50 million, increasing to 3% on net worths over $1 billion, which she claims will bring in $2.75 trillion for the Federal government over 10 years ($275 billion per year). Since this is a wealth tax, it would not be applied to annual income but would be applied to the total wealth of a person in the form of cash, stocks, bonds, property, and even private equity ownership, net of any liabilities. It should be noted that this tax is actually greater than 2% for the individual paying it because it will cumulatively reduce the level of income the payer is generating from their assets each year.

A net worth tax would require every single piece of equipment, acre of property, share of stock, etc. be appraised on an annual basis. Then the owner then has to find a way to carve out 2% of that value to ship off to Uncle Sam. This sort of wealth tax would be most damaging to those who invest in startups, as the sort of which we see spring up in Silicon Valley often reach valuations into the billions before turning a cent of profit. Taxing shareholders in those companies is effectively taxing hypothetical future wealth.

Since this is not a tax on income, it would require most wealthy people to liquidate assets to pay for it. If those assets were in the form of stocks and bonds, the wealthy individual was already paying a 20% tax on the dividends and capital gains those assets were generating each year (assuming they’re receiving qualified dividends and paying long term capital gains tax). If their wealth was in the form of real estate, the wealthy individual was already paying annual property taxes on the property. For many wealthy people, their net worth is only on paper. While our current tax system only taxes realized gains, Warren wants to tax hypothetical wealth.

Wealth taxes are disruptive – and wouldn’t generate as much revenue as advertised, given that the assets liquidated to pay the wealth tax were themselves contributing to the tax base, and evasion would be a guarantee.

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The projected revenues of $275 billion annually from a wealth tax are unrealistic, as we know from analysis of more liberal wealth taxes. French economist Thomas Piketty proposed a comprehensive wealth tax on all net worths above $260,000, ranging from 0.5%-2% with the following brackets:

  • $260,000-1,300,000: 0.5%
  • $1,300,000-6,500,000: 1%
  • 6,500,000 and over: 2%

This is a wealth tax that would apply to a drastically larger percentage of taxpayers (while still applying the same 2% tax on wealth above $50 million that Warren proposes), and yet a Tax Foundation study found that it would raise revenues by just $62.6 billion, less than a quarter of what Warren advertised. The discrepancy in revenue from Warren’s estimates and the Tax Foundation’s comes from the fact that Warren isn’t taking into account the disruptive effects a wealth tax would have, or accounting for individuals who would hide wealth offshore to dodge the tax (which is easier than you’d expect, given the fluid nature of wealth).  The Tax Foundation also found that a wealth tax of Pikkety’s design would reduce capital formation by 16.5%, eliminate 1.1 million jobs, reduce GDP by 6.1%, and decrease wages by from 7% to 10% for every income quintile.

And for that massive cost to the economy, Warren’s proposal wouldn’t even fund the federal government for a week. Wealth taxes and 70% income tax rates on the rich may be popular politically, but they won’t make a dent in America’s current fiscal hole. On the other hand, it wouldn’t surprise me if Warren and Cortez’s real endgame here is to simply punish the wealthy.