It seems like good politics. Democratic Senator Elizabeth Warren of Massachusetts, who’s running for president in 2020, wants to enact a new tax of 2% per year on household wealth above $50 million, with an additional 1% levy on wealth above $1 billion.
Polls consistently show that at least two-thirds of Americans favor higher taxes on the wealthy. So Warren’s wealth tax risks little blowback from ordinary voters. And many Americans feel disgusted with the Trump tax cuts that went into effect in 2018, because they feel businesses and the wealthy benefit much more than the middle class. They’re open to new reforms that seem fairer.
Still, despite populist appeal, Warren’s wealth tax would be hard to implement, and likely ineffective. Here are three problems with it:
Wealth is squishy. Billionaire rankings such as those published by Forbes and Bloomberg put a single annual number on individual wealth, implying it’s easy to pin down. It’s anything but. The super-rich don’t typically have all their money in a few bank accounts that are easy to tally. They own myriad assets, many illiquid, with valuations that can vary wildly. “There are a lot of games you can play,” says Douglas Holtz-Eakin, president of the American Action Forum and former director of the Congressional Budget Office. “You have to value everything, and I don’t know what my Renoir is worth this year.” Wealthy families can employ the best tax attorneys to split ownership of assets among family members, hide wealth in trusts, move it overseas and exploit dozens of loopholes to devalue assets.
There are Constitutional impediments. A wealth tax might, legally speaking, be a “direct tax,” which means that, according to the Constitution, it would have to be apportioned among states in a way that would effectively impose a higher tax on wealthy people in low-income states than in high-income states. “That would be a showstopper,” says Steve Rosenthal of the Tax Policy Center. “It’s practically an impossible barrier.”
The 16th Amendment exempts income taxes, which are also direct taxes, from the apportionment requirement. But it doesn’t mention a wealth tax. Warren’s campaign provided letters signed by 16 legal scholars saying they believe a net-worth tax would not be a direct tax, and would therefore be constitutional. Even so, if such a tax ever became law it would probably face an immediate legal challenge.
A wealth tax doesn’t directly help those who need it. Warren says her wealth tax would raise $2.75 trillion in tax revenue over a decade, or $275 billion per year, which is a lot, even by Washington standards. But taking from the rich doesn’t automatically help the poor. Sure, Warren and her affiliated do-gooders could try to earmark the money for universal pre-kindergarten or education reform or Medicare for all or other programs that might help the neediest. But Congress is also prone to spending found money, or even borrowed money, on pet projects, one reason Americans increasingly distrust their government. That makes a wealth tax a tougher sell.
It’s still possible to raise more tax revenue from the wealthy and use it to help those at the bottom, in ways that are practicable and likely to work. The 2017 Trump tax cuts raised the threshold for the estate tax, for example, meaning fewer people will pay it. But Congress could just as easily lower the threshold to the prior level, or even lower, bringing in more revenue and placing a stronger check on inherited wealth.
The earned-income tax credit is regarded as an effective tool that incentivizes work and helps lift people out of poverty. Congress could expand the EITC to include more workers or offer greater benefits.
And of course Democratic Rep. Alexandria Ocasio-Cortez of New York has floated the idea of raising the top marginal tax rate, now 37%, to as high as 70%. That seems far too ambitious, but it could move the needle toward more modest tax hikes. “I don’t think we’ll see 70%,” says Rosenthal, “but she’s shifting the baseline. It makes 50% seem more viable.” Another plus: the Constitution clearly allows that.
Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman