Elizabeth Warren had a pithy response during Thursday night's Democratic presidential debate when asked about claims by some economists that her proposed wealth tax would stifle U.S. growth: "They're just wrong."
While the impact of raising taxes on uber-rich Americans remains an open question, the Massachusetts senator does have one thing on her side — most voters like the idea. A November survey by the New York Times shows that 63% of those polled support a wealth tax. The proposal is far more popular than both a Universal Basic Income and President Donald Trump's Mexico border wall, just to name two policy ideas in the mix. Even most Republicans favor a wealth tax.
Then things get murky fast. Everything from how the wealth tax would work to who would pay it and how much money it would raise is far from clear. To that end, here's what is known about Warren's proposed wealth tax, along with some educated guesses about how her plan would work.
Who would the wealth tax affect?
About 75,000 households that are each worth more than $50 million. Only the very richest families would end up paying Warren's wealth tax. The experts who helped develop Warren's plan, University of California, Berkeley economists Emmanuel Saez and Gabriel Zucman, estimate the tax would be paid by 75,000 households —or roughly 0.05% of the 130 million U.S. households.
Another study by a trio of economists earlier this year found that for a wealth tax to generate the revenue Warren proposes the levy would need to hit as many as 296,000 households. That's a larger, but still rarified, 0.2% of the U.S. population. The fact that so few may pay the tax could explain its popularity.
How much money would it generate?
More than $4 trillion over a decade. Follow the math of Saez and Zucman, for instance, and it appears the wealth tax would bring in nearly $340 billion in the first year and around $4 trillion in the first decade. That's double the roughly $2 trillion that corporate America is expected to collect over 10 years as a result of Mr. Trump's 2017 tax cut. It's also far more than the nearly $400 billion that some estimate could be raised in the same time by raising the top income tax bracket to 70% on income over $10 million.
Warren hopes to spend that revenue from the wealth tax on everything from her Medicare for All plan to expunging college debt for millions of Americans. But some experts think her tax would not bring in nearly as much as she predicts.
Part of that has to do with tax dodging. Saez and Zucman predict that only about 15% of the potential haul would be lost to tax avoidance or evasion, though they do say it will require a "combination of systematic third party reporting and audits" to make sure the levy is "well enforced."
Others think such tax evasion will be harder to prevent. The University of Pennsylvania's Penn Wharton Budget Model recently estimated that Warren's wealth tax would generate just $2.3 trillion in a decade. Its lower number was based on an assumption that nearly half of the wealth tax's potential revenue would be eliminated by tax dodgers. The Penn Wharton model based that thinking on a number of studies, including one from earlier this year that found reported wealth in Switzerland dropped by an average of 40% after a wealth tax was imposed there.
A tax-evasion estimate of 30% — half way to Saez and Zucman's estimate — and you get a decade's total revenue for the wealth tax of $3.4 trillion.
How would it work?
Millionaires pay 2% of every dollar over $50 million; billionaires, 6%. Warren famously says on the campaign stump that all she is asking for is for millionaires and billionaires to "pitch in 2 cents so that everyone else gets a chance to make it big." Of course, it's more complicated than that.
Her wealth tax would assess a 2% annual tax on total assets of over $50 million, and a 6% tax on fortunes greater than $1 billion. The key is that the tax is only on every dollar above those marks. What that means is that someone with a net worth of $51 million would pay 2% on just that last $1 million, or $20,000. Someone worth $1.1 billion would pay $25 million, including $6 million on the last $100 million.
Then of course there's the issue of how you measure wealth. A wealth tax would likely exclude common consumer items like TVs or couches that quickly lose their resale value. Small businesses, which already report their income to the IRS, could be valued based on a standard multiple of their cashflow. Artwork or jewelry might need appraisals, or the government could go with the last known sales price.
That all might sound complicated, but local municipalities have been able to manage property tax appraisals for generations, so it's not that different than what is already being done. Just bigger.
What's bad about it?
A 2% drop in GDP over the next 30 years, some experts say. The biggest critique of Warren's plan is that it would slow the economy. The Penn Wharton Budget Model says it could cut gross domestic product by as much as 2% in a few decades.
Warren has dismissed that assessment as "wrong." During Thursday night's debate, Warren said "billionaires aren't buying more cars or eating more pizza" with the 2% of wealth she would like to tax. Instead, Warren said taxing that money and reinvesting it in childhood education and cancelling student debt would create more jobs and increase U.S. productivity over time.
The standard reasoning is that private wealth serves as a big source of investment in the U.S.. So raising taxes on wealth means there will be less money to invest in, say, new business startups or emerging technologies. At the moment, however, the problem in financial markets is not a shortage of funds, but rather that there's too much money chasing too few decent investments. That's why government bond rates are so low — investors are chasing safe yielding investments — and why stock buybacks are soaring.
In fact, it's unlikely that a 2% tax would be enough to discourage the rich from investing. A 6% tax, on the other hand, is a real matter of debate when long-term government bonds are only yielding 2%. That could discourage safe-haven investments with low expected returns. But it might encourage others. Investments in so-called moonshots — technologies with a lower percentage of success but higher potential payouts — may all of a sudden be more attractive to billionaire investors. And along with those investments could come bigger advances in innovation. Or bigger investment losses of things don't work out.
What's more, even the Penn Wharton group is predicting that any slowdown in the economy caused by a wealth tax would take decades to fully materialize. They say as late as 2050. In the first few years after the tax is passed, the economy my actually get a boost as rich people shift from saving to spending to avoid the surcharge on their assets. On top of that, all taxes, at least according to economic models, come with an economic trade-off of slower growth. So there's not much different here.
Will it make Bill Gates poor?
No. The most vocal opponents of the wealth tax, unsurprisingly, are the super wealthy. Bill Gates in November said that he thought it could damage the fundamental incentives that drive capitalism. The Microsoft founder said he would be "fine" getting taxed maybe $20 billion, "but, you know, when you say I should pay $100 billion, O.K., then I'm starting to do a little math about what I have left over."
In fact, Gates is unlikely to pay $100 billion, or anything close to that, under Warren's wealth tax. According to Bloomberg, Gates is worth $112 billion and currently ranks as the world's richest person. Using that $112 billion figure, his wealth tax bill under Warren's plan for 2019 would be $7 billion. That may sound like a lot, but remember that Gates, like most wealthy people, is raking in huge investment returns on their fortunes. Bloomberg estimates that Gates's wealth rose $22 billion in this year alone based in large part on a rise in Microsoft's stock price, up more than 50% since January. Even if Warren's wealth tax were in place, his fortune would still have risen $15 billion in 2019.
Is there a better idea?
Perhaps. Maybe even two better ideas: a financial transaction tax and raising the capital gains rate.
Vice President Joe Biden and Andrew Yang favor imposing a small tax on securities trading over the wealth tax.
Liberal economist Dean Baker, head of the Center for Economic Research, agrees. Back in 2016, Baker estimated that a transactions tax of 0.2% on stocks and 0.1% on bonds could could generate $120 billion in tax revenue a year with no drag on economic growth.
Baker this week said that shrinking the financial sector, and penalizing speculative trading, could actually boost economic growth. And he says you wouldn't have the massive evasion problems that he thinks you would see with a wealth tax. "I do think you would have to put a lot of resources into policing a wealth tax system," Baker told CBS MoneyWatch.
Wall Street lobbyists, though, have warned that a financial transactions tax could also lower investment returns, not just for banks, but also for 401(k) plan participants and other average investors. Mutual fund giant Vanguard estimates that the average person would have to work about 2.5 more years before retirement if a financial transaction tax was implemented.
Senators Amy Klobuchar and Bernie Sanders both support raising the capital gains tax in line with what is paid on regular income. That's also the favored tax move of the Penn Wharton researchers. Raising the capital gains tax to 42%, from the current 20%, could easily generate as much as $200 billion a year in tax revenue with a much smaller tax-avoidance problem, according to Penn Wharton's math.
But raising the capital gains tax is essentially a wealth tax by another name, with the one exception that many more regular investors would have to pay it than just millionaires and billionaires.