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Elizabeth Warren’s wealth tax won't work. This will

Rick Newman
·Senior Columnist
·6 min read

Democratic Sen. Elizabeth Warren of Massachusetts is dead-set on a wealth tax. It was a key plank of her failed presidential run last year, and she has now introduced legislation meant to wring more federal revenue from “ultramillionaires.”

Warren’s measure has essentially no chance of passing, because Republicans oppose it en masse and some Democrats—including President Biden—don’t support it, either. One reason: It would be a nightmare to enforce. But Biden himself has other tax ideas that are more plausible than Warren’s wealth tax and could surface later this year as Democrats look for new revenue to pay for a lavish infrastructure program and other projects.

Biden’s tax plan includes a raft of tax hikes on businesses and the wealthy that would raise about $2 trillion in tax revenue during a 10-year period, according to the Tax Policy Center. Getting any tax hike through Congress is tough, but Biden's proposal for higher taxes on the richest Americans—akin to Warren’s wealth tax—may represent the low-hanging fruit. Americans generally support tax hikes on the wealthy, giving Congress cover to enact them.

Instead of a wealth tax, Biden would target capital gains and inheritances for high-income Americans. For people with income above $1 million, Biden would raise the capital-gains tax rate to the same level as the income tax. The highest tax bracket is now 37%, but Biden wants to boost it to 39.6%, which was the level before President Trump lowered it in 2017. So Biden would raise the capital-gains tax from the current rate of 23.8% to 39.6%.

Rep. Pramila Jayapal, D-Wash., right, with Sen. Elizabeth Warren, D-Mass., at left, speaks during a news conference on Capitol Hill in Washington, Monday, March 1, 2021, to unveil a proposed Ultra-Millionaire Tax Act. (AP Photo/Susan Walsh)
Rep. Pramila Jayapal, D-Wash., right, with Sen. Elizabeth Warren, D-Mass., at left, speaks during a news conference on Capitol Hill in Washington, Monday, March 1, 2021, to unveil a proposed Ultra-Millionaire Tax Act. (AP Photo/Susan Walsh)

He’d also raise the maximum estate tax rate from 40% to 45% and lower the amount exempt from tax from $11.7 million, for an individual, to $3.5 million. Another Biden change would eliminate the “step-up” rule that basically voids capital-gains taxes on assets that have appreciated in value when the owner dies and leaves them to somebody else.

The Tax Policy Center estimates Biden’s hike in the capital-gains rate would raise $370 billion over 10 years, while the estate-tax changes would net another $220 billion. That’s $590 billion over a decade, or $59 billion per year, which is meaningful revenue even by Washington’s inflated standards. And that doesn’t include any change in income-tax rates for businesses or individuals.

The problem of enforcement

Warren says her wealth tax would raise $3 trillion over a decade, or $300 billion per year. Many tax experts are extremely doubtful. There are two basic problems with a wealth tax. The first is enforcing it. Financial assets such as stocks have a known market value, but many other assets—privately owned businesses, real estate that’s not for sale, art and collectibles—don’t have a known value. The billionaires Warren wants to target could have hundreds or thousand of assets that would need to be valued every year, to collect tax on it. Treasury Secretary Janet Yellen highlighted this when she said recently that a wealth tax has “very difficult implementation problems.”

There could be legal problems with a wealth tax as well, because of a quirk in the Constitution. Any “direct tax” has to be apportioned among the states in a manner that would effectively hit wealthy people in low-income states harder than those in high-income states. That would make the tax unworkable. Warren has mustered legal scholars arguing that her levy would not be a direct tax, while others disagree. At a minimum, it would face legal challenges, with the validity of the tax most likely hanging in the balance until the Supreme Court (which now has a 6-3 conservative majority) ruled. Imposing a new tax destined for legal challenge at the outset is not a shrewd way to safeguard the national treasury.

President Joe Biden speaks during a virtual meeting with Mexican President Andres Manuel Lopez Obrador, in the Roosevelt Room of the White House, Monday, March 1, 2021, in Washington. (AP Photo/Andrew Harnik)
President Joe Biden speaks during a virtual meeting with Mexican President Andres Manuel Lopez Obrador, in the Roosevelt Room of the White House, Monday, March 1, 2021, in Washington. (AP Photo/Andrew Harnik)

Democratic Rep. Pramila Jayapal of Washington, who's a co-sponsor of the Warren wealth tax bill, told Yahoo Finance recently that valuing assets under a wealth tax wouldn't be that difficult because the IRS already does it under the estate tax. "It actually is something we are already doing,” she said. “We just do it at death.”

Yet that highlights the problem. Assets can be valued and taxed at death because they can be liquidated, if necessary, to help pay the tax. It would be problematic, to say the least, if taxpayers, even wealthy ones, had to sell assets to pay a tax on those same assets. Plus, it's still often difficult to value illiquid assets even when the owner dies.

Rep. Biden’s capital gains and estate tax plans would require no new structure in the tax code or unusual enforcement mechanisms. He’d mainly be changing the threshold for taxes that have been on the books a long time and have changed many times before. There’d be no legal challenge, just a lot of grumbling among those who’d have to pay more.

Any tax hike raises the incentive for tax evasion, but again, it’d probably be a lot easier to move “wealth” around through offshore accounts and tricky ownership structures than to hide capital gains or assets in an estate.

Biden also wants other big tax changes, such as a higher business tax rate and higher rates for households earning more than $400,000. But he might want to start with capital-gains and estate taxes because they’re easier to target at the wealthy. The top 1% of earners capture 69% of long-term capital gains, while the top 20% of earners earn 90% of the capital gains. That shareholder class has benefited most from fiscal and monetary stimulus that has propped up the stock market for the last 11 months and helped with a decade of generous gains. If anybody can afford it, they can.

As for the estate tax, only about 1,900 U.S. estates are subject to any federal tax, which is less than one-tenth of 1% of the Americans who die in a given year. The number of estates subject to this tax was three times higher in 2009, the last year the exemption threshold was $3.5 million. Since Biden wants to return to that ceiling, assume he’d triple the number of families having to pay some estate tax. It still remains a vanishingly small number. Plus, unlike the wealth tax, it has been the law before, and there’s no question of whether it would work.

Rick Newman is the author of four books, including "Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. You can also send confidential tips, and click here to get Rick’s stories by email.

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