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  • Writer's pictureMihir Shahi

The Wealth Tax (Scholarship Essay)


 

This article was a winner of the Wealth Tax scholarship opportunity. It contains one essay arguing against the implementation of a wealth tax.

 

A wealth tax is frequently cited as a cure for the vice of capitalism - inequality. Senator Warren wants the rich to ‘pay a fair share’, and promises her wealth tax is the way to do it. However, Senator Warren’s proposed wealth tax fails in both theory and practice at achieving her stated objectives: reducing economic inequality and raising significant revenue for the federal government. It is a shockingly inefficient, unviable and thoroughly un-american policy, and deserves to be consigned to the dustbin of history.

A wealth tax goes about reducing inequality the wrong way

Senator Warren, in proposing a 2% annual levy on fortunes over $50m, rising to 6% on fortunes above $1bn, claims to be ‘giving somebody else in this economy a chance.’ [1] However, such a tax would simply give Senator Warren the satisfaction of pleasing figures which suggest that inequality is indeed falling, rather than materially help the most disadvantaged in society. It is akin to ‘losing weight by lopping off body parts’, [2] as it could theoretically achieve its goal of reducing the sum total of wealth held by the ultra rich but in doing so isn’t actually helping the ‘hardworking families of America’.

The widely preferred manner in which inequality can be reduced is through rising wages at the bottom of the income distribution scale. Between 2016 and 2019, the Federal Reserve reports that there was a noticeable reduction in income inequality within the United States, with median family income rising 5%. The mean income for the bottom quintile of the income distribution rose by 9% in 2019, faster than anywhere else in the distribution, suggesting that a growing economy, rather than a wealth tax, can deliver improvements in the lives of the poorest in our society. [3]


By reducing economic growth, the wealth tax harms the poorest in our society. Asa Hansson, through empirically estimating the relationship between the wealth tax and economic growth in 20 OECD countries over 20 years, found that wealth taxes clearly dampen economic growth. [4] According to her analysis, access to capital is an important determinant of an individual’s propensity to start a business, meaning that as wealth taxes diminishes the amount of available capital, entrepreneurship is discouraged.


By targeting wealth, the Cato institute suggests that the wealth tax ‘would boomerang against average workers by undermining their productivity and wage growth.’ [5] This is because wealth is required for investment in industry, a process which would be negatively impacted by the taxation of wealth. As a result, the wealth tax harms those Senator Warren claims she wants to help.


A wealth tax won’t raise nearly as much as its proponents claim


The natural response to the criticism that taking from the rich fails to help the poor is that the revenue garnered would fund government programs which would aim to help the poorest in our society. Relying on analysis from respected economists, such as IMF Chief Economist Simon Johnson, Senator Warren claims that $1 trillion would be raised over a 10 year period. [6]


However, history suggests that not nearly as much would actually be raised. Janet Holtzblatt, a former senior budget official now at the Tax Policy Centre, a think-tank, predicts wealth-tax revenue would “fall far short” of Mrs Warren’s hopes. [7] An OECD report examining the role of net wealth taxes finds that revenue from wealth taxes have been typically very low, comprising a very low share of tax revenue. In Spain, just 0.2% of GDP was raised from the wealth tax in 2016, and in France the wealth tax made up just 0.48% of total tax revenue. [8]


Eric Pichet estimated that while the effect of the French wealth tax was a loss of €3.5 billion of tax revenue for the French government. This was because, despite the wealth tax raising €3.5 billion, another €7 billion was lost from other revenue streams. He describes the effects of the wealth tax ‘as engendering a paradoxical situation in which all of France’s other taxpayers, including its least wealthy citizens, must bear the brunt of the tax burden’, as the wealthy flee overseas. [9]


A wealth tax, in targeting capital, is incredibly vulnerable to aggressive tax avoidance. Alexander Krenek & Margit Schratzenstaller describe how the revenue potential of a Europe-wide wealth tax is severely curtailed by increasing capital mobility allowing the wealthy to move assets into low-tax jurisdictions. [10] France, which repealed its wealth tax in 2018, experienced exactly that, with Eric Pichet estimating that around €200 billion was lost since the introduction of the tax in 1988. [11]


Valuation of wealth is an impossible task


Suppose the federal government manages to pass a wealth tax. The next step is valuation. This presents another insurmountable challenge. A tenth of the rich’s wealth is held in privately-held companies, which are inherently difficult to measure. Privately held companies are not traded in public markets, which means that there are no stock prices by which one can objectively gauge their value. 73% of economists in a survey agreed that Senator Warren’s wealth tax would be “much more difficult to enforce than existing federal taxes because of difficulties of valuation.” [12] When Austria repealed its wealth tax in 1994, large administrative costs were cited, and India’s finance minister noted that ‘the practical experience has been it's a high cost and a low yield tax’ when it was scrapped in 2015. [13]


Conclusion


Senator Warren’s proposed wealth tax is incredibly unamerican. By disincentivizing entrepreneurship and punishing wealth creation, it threatens to destroy the free-market system which has made America the most prosperous nation in history. Even if one accepts the theoretical premise of the tax, the difficulties in the implementation of the tax would surely dissuade even the most committed disciples of Senator Warren. Perhaps Senator Warren should follow the advice of the Cato Institute, which recommends consumption‐based taxation, which would tax wealth but in a simpler way that does not stifle savings, investment, and growth. [14]


 

Bibliography


  1. https://www.cnbc.com/2019/11/01/elizabeth-warren-would-double-billionaire-wealth-tax-for-medicare-f or-all-plan.html

  2. Brannon, Ike. 2020. "A Wealth Tax Is Not A Solution For Income Inequality". Forbes. https://www.forbes.com/sites/ikebrannon/2020/09/29/a-wealth-tax-is-not-a-solution-for-income-inequal ity/?sh=538a5bca7f5b.

  3. "Changes In U.S. Family Finances From 2016 To 2019: Evidence From The Survey Of Consumer Finances". 2020. Federalreserve.Gov. https://www.federalreserve.gov/publications/files/scf20.pdf.

  4. Hansson, Asa. 2002. "The Wealth Tax And Economic Growth."

  5. Cato Institute. https://www.cato.org/tax-budget-bulletin/taxing-wealth-capital-income#how-to-tax-capital.Tax And Economic Growth."

  6. Johnson, Simon, Betsey Stevenson, and Mark Zandi. 2019. Assets.Ctfassets.Net. https://assets.ctfassets.net/4ubxbgy9463z/27ao9rfB6MbQgGmaXK4eGc/d06d5a224665324432c6155 199afe0bf/Medicare_for_All_Revenue_Letter___Appendix.pdf.

  7. "What If America Introduces A Wealth Tax?". 2019. The Economist. https://www.economist.com/the-world-if/2019/07/06/what-if-america-introduces-a-wealth-tax.

  8. OECD Tax Policy Studies. 2018. The Role And Design Of Net Wealth Taxes In The OECD. Paris: OECD Publishing.

  9. Pichet, Eric. 2008. "The Economic Consequences Of The French Wealth Tax". La Revue De Droit Fiscal 14.

  10. Krenek, Alexander and Margit Schratzenstaller. 2018. "A European Net Wealth Tax," WIFO Working Papers

  11. Pichet, Eric. 2008. “The Economic Consequences of the French Wealth Tax”. La Revue de Droit Fiscal 14.

  12. "Wealth Taxes". 2019. Igmchicago.Org. https://www.igmchicago.org/surveys/wealth-taxes/.

  13. Phillips, Matt. 2015. "Forget Inequality, India Is Scrapping Its Wealth Tax". Quartz. https://qz.com/354860/sorry-piketty-india-is-scrapping-its-wealth-tax/.

  14. "Taxing Wealth And Capital Income". 2019. Cato Institute. https://www.cato.org/tax-budget-bulletin/taxing-wealth-capital-income#how-to-tax-capital.

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