How Elizabeth Warren’s Tax on the Rich Would Work

(Bloomberg Businessweek) -- Democratic presidential hopeful Elizabeth Warren dove headfirst into her campaign on Jan. 25 by proposing a new tax on the rich—an area her party has traditionally danced around.

How would it work?

The Massachusetts senator is calling for a 2 percent levy on household wealth in excess of $50 million, and 3 percent on wealth above $1 billion. The annual asset valuations this would require are relatively simple to calculate for bank accounts and publicly traded investments, but much harder to do for closely held businesses, real estate, and art.

Why tax wealth?

The plan would tax all of a household’s assets, not just income—a feature experts say is necessary to prevent avoidance. While it stands to affect just 75,000 Americans, the wealth tax could raise $2.75 trillion over a decade, vs. the estimated $353 billion that a 70 percent tax on income over $10 million, proposed by New York Democratic Representative Alexandria Ocasio-Cortez, would generate.

What’s the catch?

The wealthy might try to insulate their assets from the taxman by transferring titles outside the U.S. Famed French economist Thomas Piketty, recognizing this possibility in his 2014 book, Capital in the Twenty-First Century, called for a global tax on wealth—but such a thing would be unimaginably complex.

How Elizabeth Warren’s Tax on the Rich Would Work

Even a domestic wealth tax would be an administrative nightmare. The IRS already does total-asset valuations when a wealthy individual subject to the estate tax dies. But such analyses are highly subjective, and a wealth tax would require them to greatly expand their capabilities. More broadly, critics say taxes on accumulated wealth would discourage innovation and investment and could be unconstitutional.

What do voters think?

How Elizabeth Warren’s Tax on the Rich Would Work

While there hasn’t been much polling on a wealth tax, Democrats especially think the system is rigged against the little guy. In the lead-up to the 2017 overhaul, about 43 percent of all voters said taxes should be raised on incomes higher than $250,000, while just 24 percent wanted to cut them. In a January 2019 poll, however, 59 percent of voters surveyed supported Ocasio-Cortez’s proposal to raise the top rate to 70 percent. —With Peter Coy

To contact the editor responsible for this story: Jillian Goodman at jgoodman74@bloomberg.net

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