Wealth tax won’t stand up to scrutiny

Elizabeth Warren, the Massachusetts senator and Democratic presidential candidate, recently proposed a way to make it easier to fund government programs: a 2% tax on all personal net worth in excess of $50 million and a 3% tax on net worth in excess of $1 billion. One estimate has this tax yielding $2.75 trillion of revenue over 10 years. Other Democrats in the presidential race have advocated other wealth taxes as well.

Election season is a great time to vet big ideas, and this one should not pass the test. It will not make our tax system more equitable, and in reality it will not raise enough revenue to pay for much.

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We all have different ideas about what’s fair, but the wealthiest Americans already pay a very large share of the tax burden. According to Pew Research, in 2014, people with incomes above $250,000 per year paid 51.6% of all individual U.S. income taxes. The top 0.1% of income earners pay 31.1% of their income in federal taxes. Those in the bottom 50% pay considerably less than 10 percent, and many pay no federal taxes at all.

In a market economy, we earn wealth as a reward for producing something consumers value. Steve Jobs accumulated $8 billion for developing products like iPhones that millions wanted and were willing to pay for. Taxing this wealth means less incentive to serve customers through innovation or lower prices, both of which raise living standards.

Additionally, to get through Congress, a new wealth tax would almost certainly be full of the usual loopholes for special interests. After all, members of Congress rely heavily on funding from wealthy donors.

Wealth tax proposals would give one-percenters less incentive to serve American consumers and more incentive to seek and take advantage of the tax favors politicians dole out. That also means it would raise considerably less money than we might expect.

The only way to raise substantial revenue from a wealth tax is to impose it on a much larger share of the population than just the super rich, as they do in Switzerland. Its wealth tax, which generates 3.3% of Swiss tax revenue, is paid by middle class taxpayers with a net worth as little as about $100,000 in U.S. dollars.

A number of other high-income countries have tried and abandoned their own wealth taxes; 12 European countries had annual wealth taxes in 1990. All but three have since repealed them, for reasons including scant revenue raised, hefty administration costs, reduced economic growth, and an exodus of wealthy individuals and their money.

Looking at the 2% wealth tax proposed by French economist Thomas Piketty, the Tax Foundation estimated a 4.2% reduction in American wages, a 13% reduction in the capital stock, 900,000 jobs lost and a 4.9% reduction in GDP. The diminished economic activity leaves only about $20 billion in annual revenue from the wealth tax.

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There’s no question that we need to balance the government’s books and avoid a future default on our growing debt. A wealth tax is not the best way to do it. Eliminating the loopholes in our current income tax system and cutting government spending might not excite the electorate, but that would boost economic growth while reducing deficits.

Tracy C. Miller is a senior policy research editor with the Mercatus Center at George Mason University.

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