US Senator Elizabeth Warren will propose a new annual "wealth tax" on Americans with more than US$50 million in assets, according to an economist advising her on the plan, as Democratic leaders vie for increasingly aggressive solutions to the nation's soaring wealth inequality.
Emmanuel Saez and Gabriel Zucman, two left-leaning economists at the University of California, Berkeley, have been advising Warren on a proposal to levy a 2 per cent wealth tax on Americans with assets above US$50 million, as well as a 3 per cent wealth tax on those who have more than US$1 billion, according to Saez.
The wealth tax would raise US$2.75 trillion over a ten-year period from about 75,000 families, or less than 0.1 per cent of US households, Saez said.
Warren's campaign declined to comment on details of the plan.
"The Warren wealth tax is pretty big. We think it could have a significant effect on wealth concentration in the long run," Saez said in an interview. "This is a very interesting development with deep root causes: The fact inequality has been increasing so much, particularly in wealth, and the feeling our current tax system doesn't do a very good job taxing the very richest people."
Warren's proposal includes at least three new mechanisms to combat tax evasion, according to a person familiar with the plan. Those are a significant increase in funding for the Internal Revenue Service; a mandatory audit rate requiring a certain number of people who pay the wealth tax to be subject to an audit every year; and a one-time tax penalty for those who have more than US$50 million and try to renounce their US citizenship.
Warren's wealth tax proposal reflects the Democratic Party's leftward drift on economic policy and tax issues. Democratic politicians have traditionally shied away from proposing how they would raise revenue, for fear of being branded "tax and spend" liberals, said Jim Manley, who served as an aide to former Senate Majority Leader Harry Reid.
Saez and Zucman earlier this week published an op-ed in the New York Times about Democratic Representative Alexandria Ocasio-Cortez's proposal to raise marginal tax rates to 70 per cent on income above $10 million, a plan the economists said would help combat an "inequality crisis" akin to climate change.
"It's a pretty dramatic change that shows how much the party has evolved," Manley said. "It's not where everyone in the party is now, but it's an awful lot of people."
Republicans are likely to seize on the plan as another example of Democrats looking to tax Americans' hard-earned gains, even though it would apply to only a tiny percentage of the population. In their major tax overhaul passed December 2017, Republicans significantly hiked the threshold for the federal estate tax - exempting estates with assets of US$11.4 million (in 2019) or less from paying it. They have often referred to this provision, which affects several families a year, as the "death tax."
Saez said the proposal came together quickly over the course of the last two weeks, while adding the economists have spent years considering how to enact a wealth tax.
Saez and Zucman initially evaluated a proposal at Warren's request to levy a 1 per cent wealth tax on income above $10 million, rather than a 2 per cent wealth tax above $50 million, according to a January 14 letter the economists sent to Warren. That letter was obtained by The Washington Post.
According to people familiar with the matter, Warren's team has considered multiple different proposals with various rates.
In recent decades the taxation of wealth has fallen out of favour in the world's richest countries. In 1990, 12 member countries of the Organisation for Economic Co-Operation and Development imposed some form of wealth tax.
By 2017, that number had fallen to just four: France, Norway, Spain and Switzerland. That decline has been mirrored by a decline in the taxation of high incomes, as well as a rise in inequality, according to the OECD.
The OECD report concludes that the merits of a wealth tax depend in part on how a country taxes capital gains - the income accrued from capital - and estates. Overall, it recommends that "tax exemption thresholds should be high to ensure that the net wealth tax is only levied on the very wealthy," and that "tax rates should be low and take into account tax rates on capital income to avoid imposing excessively high tax burdens on capital so as to prevent capital flight."
Estimates of how much money can be raised by taxing the very rich vary dramatically. The Institute on Taxation and Economic Policy, a left-leaning think tank, published a report on Wednesday finding that a 1 per cent wealth tax on the wealthiest 0.1 per cent of Americans would raise $1.3 trillion over a decade. That would affect U.S. households with wealth above $32.2 million.
But conservatives have warned that high taxes on the very rich will stifle growth, lead to capital flight, and produce relatively minor revenue gains. Earlier this month, the right-leaning Tax Foundation found that Ocasio-Cortez's plan for a 70 per cent tax rate would either only raise $189 billion in revenue over 10 years, or lose the federal government $63.5 billion.
The Tax Foundation has also warned against wealth taxes, arguing that "capital accumulation is an essential ingredient for economic growth," that wealth inequality does not harm the economy, and that wealth rewards entrepreneurs who take risks.
Since announcing her presidential bid, Warren has pitched herself a champion of the working class against elites, arguing "billionaires and big corporations" have rigged the political and economic system to their advantage. The possibility of a wealth tax proposal comes on top of her plan to force corporations to have 40 per cent of their board of directors selected by company employees, as well as her support for Sen. Bernie Sanders,' I-Vt., plan to provide "Medicare-for-all" by nationalizing the health insurance industry.
The wealthiest 1 per cent of families currently face a total tax burden, including state and local taxes, of about 3.2 per cent relative to wealth, Saez and Zucman write in their letter.
The bottom 99 per cent of families currently has a tax burden of 7.2 per cent relative to their wealth, the economists say.
"One of the key motivations for introducing a progressive wealth tax is to curb the growing concentration of wealth," Saez and Zucman wrote to Warren in their Jan. 14 letter. "The top 1 per cent wealth share has increased dramatically from about 22 per cent in the late 1970s to around 40 per cent in recent years. Conversely, the wealth share of the bottom 95 per cent of families has declined from about 50 per cent in the late 1970s to about 40 per cent today."
- Washington Post