(Bloomberg Opinion) -- According to Elizabeth Warren, economists who say that her proposed wealth tax would stifle investment and growth are “just wrong.” Leaving aside the question of whether economic projections, which by definition require assumptions about future human behavior, can be right or wrong, it is true that her proposal has spurred a vigorous debate among economists. A lot of the points they make do not bode well for her plan.
There is widespread skepticism about whether the tax would raise the revenue its proponents suggest, for example. Meanwhile, one comprehensive budget model estimates that Warren’s proposal would shrink the U.S. economy by between 0.9% and 3.5%.
One possible consequence of her plan that has received too little consideration is its effect on international investment flows. There are good reasons to believe that a wealth tax would put U.S. investors at a disadvantage relative to their foreign counterparts.
First, the wealth tax would result in a sharper fall in national income than in GDP. If taxes on U.S. corporations themselves stayed competitive and the regulatory environment remained favorable — two things that Warren is also looking to change — the U.S. would remain an attractive place for global investors.
The implication, however, is that a greater share of U.S. wealth would be owned by foreigners. Wealth inequality within the U.S. might fall, but not because of a redistribution of wealth within the U.S. Instead, U.S. businesses and workers would be increasing the fortunes of foreign investors.
Second, greater foreign ownership of U.S. assets would lead to a higher trade deficit. Before they can invest in the U.S., foreigners have to purchase dollars. That would drive up the value of the dollar and make U.S. exports less competitive — and foreign imports more competitive.
This effect would hit U.S. manufacturing and agriculture particularly hard, undermining Warren’s goals of reviving those sectors. Even worse, unlike past increases in the trade deficit, this one wouldn’t represent an increase in total U.S. investment but rather the effect of foreigners replacing lost domestic investment.
Third, the wealth tax would put private businesses at a disadvantage. Unlike their publicly traded rivals, they depend more heavily on domestic investment. The biggest international corporations, meanwhile — which Warren argues already have too much monopoly power — are almost all publicly traded. Her wealth tax would give them even more power.
Lastly, the wealth tax has the potential to change the nature of U.S. entrepreneurship — and not for the better. Emmanuel Saez, one of the economists who helped design the tax, has said that one of its purposes is to prevent founders of successful companies from maintaining control of their enterprises.
Immigrants come to the U.S. to start businesses not just to make money, but to realize their vision. If the U.S. tax code makes that harder, over time the rest of the world outside of America would start to attract a greater share of entrepreneurs. It wouldn’t happen overnight, but eventually U.S.-born entrepreneurs might start moving to Singapore or Dublin to form startups. The wealth tax could wind up decreasing the U.S.’s exports of goods and increasing its export of talent.
These types of economic changes are difficult to model. But the threats they pose are very real, and economists are right to warn Warren about them.
To contact the editor responsible for this story: Michael Newman at mnewman43@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Karl W. Smith, a former assistant professor of economics at the University of North Carolina and founder of the blog Modeled Behavior, is vice president for federal policy at the Tax Foundation.
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