Ever since they started proposing tax-the-rich plans on the campaign trail, Sens. Elizabeth Warren and Bernie Sanders have been facing charges that the proposals won’t work. Now the economists who came up with the idea are starting to push back against the haters.
Critics of the Warren (D-Mass.) and Sanders (I-Vt.) plans say it’s too hard to figure out how much wealth there is in the U.S., and they point out that wealth taxes failed in Europe. They also argue that wealth taxes are unconstitutional.
But here’s why backers of the Sanders and Warren plans say taxing the wealthy to pay for everything from a range of education initiatives to "Medicare for All" is still the answer to America’s problems.
It didn’t work in Europe, so why will it work here?
Even Democrats, like Andrew Yang, the California tech entrepreneur also seeking the party’s presidential nomination, point out that a number of European countries including France and Germany have abandoned their wealth taxes. “All those countries ended up repealing it, because it had massive implementation problems and did not generate the revenue that they'd projected,” Yang said at an October debate.
But Emmanuel Saez and Gabriel Zucman, the economists who helped Warren and Sanders craft their wealth taxes, have been making the case in academic articles and newspaper op-eds that a wealth tax would succeed here because the U.S. is different.
European wealth taxes generally hit a broader chunk of the population, aiming more at the rich than the super-rich, and had their fair share of exemptions for items like art or companies where the owner was heavily involved in the business. The Sanders and Warren versions of the wealth tax, on the other hand, would only affect people with tens of millions of dollars in assets, and their plans aren’t currently designed to have exemptions.
The U.S. also taxes citizens on income made abroad, meaning that Americans would essentially have to renounce their citizenship to escape a wealth tax (and would even then face an exit tax). European countries don’t tax their citizens that way, so avoiding a wealth tax could be as simple as just moving to a neighboring country, which is less of a hassle given the relatively open borders there.
On top of that, the U.S. has strong protections against tax evasion in place, largely through the Foreign Account Tax Compliance Act enacted under former President Barack Obama, which forces foreign banks to disclose information about American account holders.
“Any time you’re raising a lot of revenue from very wealthy people, there are going to be lots of efforts at tax avoidance. But a wealth tax seems no worse than the other options," said Lily Batchelder, a New York University law professor who worked in the Obama White House, noting that the amount of tax avoidance would largely depend on how many carve-outs are included in a tax-the-rich plan.
How do you figure out how much wealth there is to tax in the first place?
Saez and Zucman estimated back in January that Warren’s wealth tax would raise $2.75 trillion over a decade, and almost immediately that projection was criticized for being almost hopelessly optimistic — particularly for assuming that wealthy people would be able to reduce their net worth for tax purposes by only 15 percent. (Warren recently expanded her wealth tax to help finance a Medicare for All plan.)
Larry Summers, a senior economic official in the last two Democratic administrations, and Natasha Sarin, a law and finance professor at the University of Pennsylvania, looked at estate tax data to argue that a wealth tax would raise only 40 percent, at most, of what Saez and Zucman are projecting.
But just how useful a tool the estate tax is for figuring out how much wealth there is in the U.S. is a matter of debate. Batchelder, for instance, said “we have surprisingly poor data on wealth in the U.S.” and questioned “whether we should interpret the estate tax as a good base for imputing how much wealth there is.”
Saez and Zucman based their higher estimate on a couple of sources — a survey conducted every three years by the Federal Reserve focused on the financial condition of families in the U.S., and from a dataset created by Saez, Zucman and Thomas Piketty, another prominent economist whose work focuses on inequality.
What’s all that stuff worth?
Another big problem with a wealth tax: figuring out how to value all the assets held by the rich.
That’s not an issue for items like publicly traded stocks. But what about a company where the shares are held by one family or a small number of stockholders? Or art or intellectual property?
Generally speaking, human appraisers have done the work of valuing those assets in European wealth taxes and for the estate tax here. But David Gamage, an Indiana University law professor, argues that information technology advancements in recent years could help take out the human element that frequently allows wealthy taxpayers to choose their own appraisers, who would have good reason to tip the scale toward their clients.
“A good appraiser can be more accurate than a formula, because he or she can take account of more factors. The problem is that the IRS doesn’t have the resources to hire many of its own appraisers,” Gamage said.
The alternatives, Gamage argues, include approaches that rely on formulas — for instance, adjusting the value of an asset either up or down each year by formulas released by the IRS, much like the tax collector already does for cost-of-living adjustments and in other areas.
Is it constitutional?
Wealth tax supporters have released opinions from a range of scholars arguing that the proposal passes constitutional muster. But even sympathetic legal experts acknowledge that the Supreme Court’s five-justice conservative majority might not see it that way.
The problem: The Constitution requires that states must shoulder an even burden of any direct tax, so each state’s residents must pay a share of the tax equal to that state’s share of the U.S. population. But rich people are concentrated in certain states, like New York and California, so with a wealth tax, people in those states would no doubt pay a higher percentage of the revenue than their state’s percentage of the U.S. population.
Scholars who believe a wealth tax is constitutional argue that only a narrow band of taxes should be classified as direct, and that a wealth tax should easily fall within the broad congressional powers to collect taxes for the country’s common defense and general welfare.
But to get around a potential Supreme Court roadblock, some wealth tax supporters are now floating the idea of fallback provisions that would raise other taxes on the rich if the courts did strike down a wealth tax. “There are often political obstacles, but there’s nothing inherently problematic about it constitutionally,” said Michael Dorf, a Cornell law professor.
Even some progressives who want a lot more revenue out of the rich argue that it’s hard enough to craft one measure hiking taxes, let alone two.
Precedents for legislative triggers do exist, like a balanced budget measure from the Reagan era known as Gramm-Rudman-Hollings. But George Callas of Steptoe & Johnson said that lawmakers decided against tax triggers multiple times during his span as a GOP tax aide on the Hill.
“We discovered time and time again that drafting a tax increase with an effective date that is contingent upon an uncertain future event is very tricky,” he said.