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Warren's wealth tax will generate $1 trillion less than she claims, study finds

Warren asked to define "middle class" for taxes
Elizabeth Warren asked to define who is in the "middle class" for taxes 00:22
  • The wealth tax proposed by presidential hopeful Elizabeth Warren could generate $1 trillion less than she estimates, according to a University of Pennsylvania study.
  • Rich Americans are likely to dodge the tax through either legal or illegal means, the analysis says.
  • The wealth tax could also result in a decline in GDP and lower wages, the researchers conclude.

Senator Elizabeth Warren's plan to tax the fortunes of uber-wealthy Americans could generate $1 trillion less in revenue than she forecasts, according to a new analysis

Warren has proposed imposing a 2% surcharge tax on wealth of $50 million or more, with the rate rising to 6% on billionaires. Her campaign estimates the tax would generate about $3.75 trillion in new revenue, which would be used to fund "Medicare for all" and other public programs. 

Not so fast, according to the University of Pennsylvania's Penn Wharton Budget Model. The nonpartisan research group says Warren's wealth tax is likely to generate $2.7 trillion over a decade, or about $1 trillion less than she expects, partly due to tax avoidance by wealthy families. 

The projection "includes both legal responses by taxpayers to reduce their tax exposure as well as illegal evasion," they note. 

Warren's campaign pushed back, saying the analysis failed to account for the "strong anti-evasion measures in her wealth tax," according to a spokeswoman. "This is an analysis of a different and worse plan than Elizabeth's, using unsupportable assumptions about how the economy works, and its conclusions are meaningless," she said.

Tax avoidance

The question of tax avoidance is a common point of contention in assessing the potential impact of wealth taxes, with critics pointing out that the richest families have plenty of means at their disposal to lower their tax bill. But University of California at Berkeley economists Gabriel Zucman and Emmanuel Saez — experts on inequality who have advised Warren on her wealth tax — say rigorous tax enforcement would help. 

"You have lots of reactions of the type, 'Oh, this is impossible — they will find ways to dodge the tax, you can't tax the rich. It'll never work',"  Zucman told CBS MoneyWatch in October. "What we want to explain is, yes, if there is a political will to address the rise of inequality, then, yes, we can do something."

Ray Dalio says wealth inequality is a national emergency 13:32

Some countries that have tried wealth taxes have abandoned them, according to the Penn Wharton Budget Model. "An OECD review concluded that administrative difficulties, modest revenues and failure to adequately address wealth inequality are among the main reasons why most member countries have abandoned wealth taxes," they wrote.

GDP hit?

The analysis says a wealth tax could also crimp U.S. economic growth and hurt wages. By the Penn Wharton experts' reckoning, the wealth tax would cause the economy to contract between 0.9% and 2.1% by 2050. Average wages could also slide, even affecting households not rich enough to qualify for the tax. 

Still, the study acknowledges that such projections depend partly on how the government would use new revenue generated by a wealth tax. The most effective social programs funded by a wealth tax could boost productivity and boost the labor market, the research group said.

Billions in federal taxes are never collected 01:19

"An investment in early childhood education might lead to additional labor-market dynamics that boost the economy beyond adding to the productivity of future workers by, for example, increasing female labor-force participation rates over time," they wrote.

But, they added, "At the same time, a considerable amount of wealth inequality in the United States has historically been driven by entrepreneurship, a factor that has received very little attention in tax models and analysis."

The Associated Press contributed to this report

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