Wealth Tax

(Bloomberg) -- As the rich get richer around the globe, ideas for tapping that wealth are also on the rise. Some proponents see new or higher taxes on the wealthy as the fairest way to pay for new initiatives, while others see them as a tool to combat inequality. But getting money out of deep pockets may be easier said than done. Some countries that tried it have reversed course.

The Situation

Many of the potential Democratic Party challengers to U.S. President Donald Trump in the 2020 election are pushing proposals to tax the rich. The money would pay for action on climate change, the creation of a federal child-care program, expanding health care or increasing tax credits for poor or middle-class households. Senator Bernie Sanders has proposed expanding the estate tax to cover the holdings left at death by the wealthiest 0.2% of Americans, and raised the idea of an annual 1% tax on “extreme wealth” held by the top 0.1%, which he defined as assets exceeding $21 million. Senator Elizabeth Warren called for a 2 percent annual tax on household wealth in excess of $50 million that would rise to 3 percent on every dollar above $1 billion. The idea that generated the most debate, however, was from a newly elected member of Congress who at 29 is too young to run for president, Representative Alexandria Ocasio-Cortez. She proposed raising the income tax rate on earnings above $10 million a year to 70%, a level not seen since 1981. Sanders, Ocasio-Cortez and others also want new levies on trades in stocks, bonds and derivatives, an idea that’s been debated within the European Union since 2011; Sanders would use a transactions tax to wipe out U.S. student debt. In France, President Emmanuel Macron’s 2017 decision to exempt financial holdings from a longstanding wealth tax contributed to the anger that set off the so-called Yellow Vest protests a year later. In Asia, where inequality has been rising especially rapidly, some countries that aren’t strapped for cash, such as Singapore, are considering increases in taxes on large property holdings as a way of putting a lid on inequality. China’s push to cut taxes for its middle class has led to expectations that the government will squeeze more from its growing ranks of affluent households.

The Background

The wealth tax debate has been reinvigorated by a growing consensus that inequality poses a long-term threat to the stability of capitalism. It was fueled by Thomas Piketty’s 2013 book “Capital in the Twenty-First Century,” which asserted that the rate of return on investments has historically outpaced broader economic growth and wages, meaning that inequality will increase unless offset by other forces. But in practice, wealth taxes can be costly to implement and don’t always collect much revenue. All but four of the 15 European countries that introduced them in recent decades repealed them. Spain effectively abolished its levy on wealth of roughly over 1 million euros (about $1.2 million) in 2008 but brought it back in 2011, and efforts are again underway to repeal it. In Germany and Norway, unequal treatment of different asset classes contributed to money moving out of stocks and bonds and into real estate. Other kinds of taxes have proved more stable. The Nordic countries have some of the world’s highest individual tax rates (Slovenia has the highest, at 61.1%) but also support their extensive social benefits with sales taxes on goods that are paid by the broader population, not just the rich.

The Argument

On one level, debates about taxes aimed at the rich are ideological clashes about the role and size of government. Trump and allies in his Republican Party have denounced the proposals as “socialism.” Ocasio-Cortez and the Democrats running against Trump cast them as a matter of fairness after decades of Republican tax cuts that favored the affluent — a position that polling suggests is supported by a majority of voters. In Europe, the arguments have been more about practicality and side effects. For example, would a financial transaction tax siphon wealth from banks and their affluent clients? Or would it just make markets less efficient and increase costs for companies raising money to expand? One study concluded that France lost roughly twice as much through tax evasion than its wealth tax brought in. (Piketty said that such taxes might need to be coordinated on a global scale to prevent that.) Other research suggests high income tax rates would do little to reduce U.S. inequality because so much of what top earners make comes in the form of capital gains or partnership payouts that are taxed at lower rates. The idea of higher U.S. taxes got a boost in June with a public letter supporting a wealth tax signed by 19 people who identified themselves as being in the richest 0.1%, including billionaire George Soros, heiresses to the Pritzker fortune, Abigail Disney and Facebook Inc. co-founder Chris Hughes, among others. “America has a moral, ethical and economic responsibility to tax our wealth more,” they said. 

The Reference Shelf 

• A Bloomberg News  article on how the richest Americans might avoid these taxes.
• Trump — yes, Trump — also once proposed a big one-time tax on the rich.
• One year after the GOP tax cut, the rich were the winners.
• Ocasio-Cortez’s idea for a 70 percent top tax rate is a  reality in Sweden.
• The Washington Center for Equitable Growth explains how a wealth tax could work in the U.S.
• Women in Congress are  pushing the Democratic party’s boundaries on economic policy.

©2019 Bloomberg L.P.