There’s Value in Trying a Wealth Tax

(Bloomberg Opinion) -- There was a bit of a kerfuffle in economics-land recently over how much money could be raised by a federal wealth tax. Economists Emmanuel Saez and Gabriel Zucman, who are working with presidential candidate and Senator Elizabeth Warren on a proposal for a 2% federal wealth tax on Americans with more than $50 million, claim that the levy would raise $187 billion in the first year (not counting an additional proposed surtax on billionaires). But writing in the Washington Post, economist and longtime Democratic policy adviser Larry Summers and law and finance professor Natasha Sarin cast doubt on that figure, and argued that the tax would raise much less -- perhaps only $25 to $75 billion a year. .Summers and Sarin base their estimate on the estate tax. The U.S. government now collects about $10 billion in taxes on estates worth more than $50 million. Since the rate on the top estate tax bracket is 40%, and assuming that 2% of rich people die every year, Summers and Sarin calculate that a 2% wealth tax on those same fortunes would raise about $25 billion..Of course, in the real world, wealthy people don’t pay the full 40% rate -- they avoid much of the tax through legal loopholes such as gifts to spouses. In reality, estate taxes nab only about 13.5% of these large fortunes. But Saez and Zucman plan on closing many of those loopholes. Summers and Sarin calculate that if the full 2% tax were collected on fortunes of more than $50 million, revenue would be $75 billion a year..That’s still way below Saez and Zucman’s projection of $187 billion. What explains the difference? First, as Saez and Zucman said in a response to Summers and Sarin, wealthy people may simply be failing to report large percentages of their estates. A beefed-up Internal Revenue Service, they argue, would crack down on such shenanigans, limiting total underreporting and avoidance to 15% of total assets. Summers and Sarin, however, doubt that this number is realistic..A second possibility is that the rich are not as rich as Saez and Zucman believe. Because data on very large fortunes is hard to come by, economists are forced to guess at how much money the country’s wealthiest people have. They use a patchwork of data sources -- the Survey of Consumer Finance, estate taxes, income tax records on capital income and even the Forbes 400 list. Relying on this data requires a lot of assumptions, and small tweaks can yield very different pictures of how much wealth the top 1% or the top 0.1% really holds..For example, when a team of economists at the Federal Reserve Board attempted to calculate the wealth share of the top 1%, they came up 31.5%, a number that was considerably lower than the numbers Saez and Zucman cited:.The numbers Saez and Zucman use, in contrast, showed the top 1% held about 38.6% of national wealth in 2016. If the fortunes of the super-rich are more in line with the Fed’s numbers, it would mean less revenue from a wealth tax..There is a real possibility, therefore, that wealth taxes could fail to rake in the large amounts of revenue that Warren, Saez and Zucman anticipate. Disappointing revenues, combined with large and unwieldy bureaucracies required to collect the tax, are why most European countries eventually abandoned wealth taxes..But although these dangers are very real, they don’t mean that the U.S. shouldn’t try a wealth tax. If revenues are lower than expected because the wealthy simply aren’t as wealthy as advertised -- or because they accumulate fewer assets in response to the tax -- it means lower inequality and less need for redistribution..Meanwhile, if the rich turn out to be as good at dodging wealth taxes as they are at avoiding the estate tax, it only magnifies the need for multiple kinds of taxation. Income taxes, capital-gains taxes, wealth taxes and estate taxes will form a sort of defense in depth -- if money doesn’t get caught at one stage of the process, it may be caught and taxed at another. This sort of multilayered taxation may be the only way that modern governments can counter the armies of accountants and lawyers that extremely wealthy people have at their disposal..And if a wealth tax turns out to be an unwieldy boondoggle like the ones in Europe -- or if it fails to pass constitutional muster -- it can always be scrapped and replaced. There are alternatives available, such as higher inheritance and income taxes. The battle to make the U.S. wealth distribution more equitable will be a long and difficult one..To contact the editor responsible for this story: James Greiff at jgreiff@bloomberg.net.This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners..Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion..©2019 Bloomberg L.P.

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There’s Value in Trying a Wealth Tax

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