(Bloomberg Opinion) -- For $25, you can head over to Senator Elizabeth Warren’s presidential campaign website and purchase a “billionaire tears” coffee mug. Designed to commemorate an incident from earlier this month when billionaire Leon Cooperman, as described on Warren’s website, “was brought to tears on live television while discussing the prospect that a President Elizabeth Warren might require him to pay his fair share in taxes,” the website suggests using the mug to enjoy “a warm, slightly salty beverage.”
So perhaps everyone can agree that Warren’s proposal to tax wealth as well as income really is part of an effort to divide the nation by financial class.
Let’s back up. Warren would impose a 2% annual tax on household wealth above $50 million, and a 6% annual tax on net worth above $1 billion. This proposal would have serious practical and economic problems. It would be extremely difficult to administer, yield much less revenue than its supporters believe, face a constitutional challenge that it might lose, reduce national saving, and suppress risk-taking, entrepreneurialism, and innovation.
These concerns should be enough to generate good-faith opposition from people with a lot less money than Wall Street tycoons like Cooperman. But my objections run deeper. Sound public policy requires balancing competing interests. A 6% annual wealth tax would fail to achieve appropriate balance in several important ways.
Start with progressive taxation, which I support. Basic notions of fairness suggest that higher-income households should pay relatively more in taxes, with some of their income redistributed to households with few resources. In the U.S. today, the bottom 20% of households face a tax rate of about 2%. When you include the means-tested transfer payments these households receive, like welfare checks, food stamps and Medicaid, their average rate falls well below zero, to minus 70%. The top 1% pay a 33% rate.
At the same time, the tax code — like all public policy — should treat the rich as citizens in a shared social enterprise. It should not treat them as a mere revenue-generating mechanism for programs that benefit the rest of society. Their welfare should receive some consideration in the design of the tax system.
Good tax policy would balance the moral obligation of the rich to pay more with the need to avoid reducing the rich to piggybanks for the rest of society. Warren’s wealth tax doesn’t come close to striking this balance. She suggests, for example, that you use her “billionaire tears” mug “as you contemplate all the good a wealth tax could do: universal childcare, student debt cancellation, universal free college, and more.”
Two other objectives that need to be balanced: using the tax system as a neutral tool to raise government revenue to finance the spending programs society deems necessary, and using it as a means of achieving specific social goals. The current U.S. tax system does both, as it should. Consider the earned-income tax credit, a subsidy to low-income, working households. The point of the credit isn’t to raise revenue — instead, the credit is designed to increase employment and fight poverty.
But the primary purpose of the code needs to be revenue. Why? One reason is to protect the integrity of the tax system, which largely relies on voluntary compliance. If households and businesses come to view the system as a partisan tool designed to implement a certain vision of society, they may be more willing to evade and avoid the taxes they owe.
Current wealth-tax proposals stray too far from revenue generation. Several of their most prominent advocates argue that their purpose is to “safeguard democracy.”
“There’s no question to my mind that the United States is moving toward an oligarchy,” Bernie Sanders, who has his own wealth-tax proposal, said last month. “This is an issue that has to be addressed, and this wealth tax begins to do that.”
I am comfortable with the federal government taking modest steps to prevent plutocracy, though I do not think this is a problem in the U.S. today. Political influence is much more diffuse than Warren seems to think. There are powerful people in both political parties with much less than a 10-figure net worth. And a great deal of political influence resides in organizations like the National Rifle Association and teachers’ unions, not with billionaires.
But the Warren wealth tax isn’t modest. With wealth taxes, small numbers lead to big effects. Applied to an asset yielding a steady return of 1.8% (at the time of this writing, the rate for the benchmark 10-year Treasury note), a 6% wealth tax is equivalent to a 333% income tax. Over 10 years, such a tax would cut the fortunes of many billionaires in half.
Over longer periods, it would lead to even larger reductions. According to a model built by economists Emmanuel Saez and Gabriel Zucman, advisers to Warren and advocates of the wealth tax, if the senator’s plan had been in effect since 1982, Bill Gates would have had 81% less wealth in 2018. Rather than $88.3 billion, Warren Buffett’s wealth would have been $14.5 billion. Jeff Bezos would have had about one-third of his fortune.
It’s hard to imagine the threat of oligarchy ever being so dire in the U.S. that such an extreme policy would be justified. And extreme solutions to manageable problems create problems of their own. Former president Barack Obama’s advice last week to Democratic presidential candidates was wise: “This is still a country that is less revolutionary than it is interested in improvement.”
For the tax system to maintain its integrity over the long run, it has to balance its objectives against the fact that the revenue it raises ultimately comes from individuals. The aggressiveness of the wealth tax would lead to significant avoidance and evasion. Some rich people would relinquish their U.S. citizenship. Others would find loopholes. My Bloomberg Opinion colleague Noah Smith writes that when France imposed wealth taxes much lower than Warren’s, rich people left for Belgium and France lost significant income-tax revenue. (France has since repealed its soak-the-rich taxation.)
Warren’s tax would fail another balancing act — one that is at the core not just of the tax system, but of the U.S. system of government. In a democracy, the right of the majority to rule must be balanced against protections for minority groups.
Warren’s tax would hit 75,000 families, or roughly 0.06% of U.S. households. In part, to be sure, it would be levied against that small group to raise some of the revenue needed to finance her programs. That’s legitimate.
But as the public debate has made perfectly clear, it would also be levied to knock the rich down a peg. Because the aesthetics of a society in which a few have fabulous wealth are unappealing to some. Because many believe no one needs that much money, and want to use the tax code to take it.
This would be an abuse of the tax system. It would be an abuse of government power. The tax code shouldn’t be weaponized for the purpose of penalizing any minority. Not even the rich.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and resident scholar at the American Enterprise Institute. He is the editor of “The U.S. Labor Market: Questions and Challenges for Public Policy.”
©2019 Bloomberg L.P.
RECOMMENDED FOR YOU
POPULAR