A Wealth Tax is a Terrible Idea
By Josie Gallagher
Throughout the first stage of the Democrats’ nomination contest, Sens. Elizabeth Warren and Bernie Sanders seemed to be competing against one another for who can impose the most burdensome new taxes — or better yet, who can crash the U.S. economy quicker if elected.
Both candidates promise to impose higher estate taxes, higher taxes on small businesses, and a new “wealth tax,” which the Tax Foundation’s analysis shows would kill jobs and slow economic growth.
Warren and Sanders agree that income inequality is an issue that must be addressed by a more progressive tax system. It’s an understandable view for the two since they both put their faith in the same economists, Emmanuel Saez and Gabriel Zucman of the University of California, Berkeley. These two economists recently released a study on wealth inequality arguing that U.S. tax rates are nearly equal for all income levels.
David Splinter, an economist with Congress’s Joint Committee on Taxation, issued a public response to Saez and Zucman’s findings, explaining the inaccuracy of their calculations. He compared their findings to several other economic models and found that after adjusting Saez and Zucman’s average tax rate calculations, their estimates closely resembled the other models that all show that the United States already has a very progressive tax system.
Even with the Saez and Zucman study largely debunked, both Warren and Sanders continue to support its findings.
Both campaigns agree that one way to correct income equality is to tax the wealthiest Americans on their savings rather than their incomes. But the wealth tax is not simply a tax, as Warren says it, on “the diamonds, the yachts, and the Rembrandts.” A wealth tax is a levy on the investment, production, and growth of the economy.
Sanders and Warren claim that their wealth taxes would be used to help fund new social programs, such as affordable housing, universal child care, “Medicare for all,” and in Warren’s plan, to provide more funding to traditional K-12 schools. Unfortunately, these plans are expensive. As Sanders confirmed on his campaign site, “Under this plan, the wealth of billionaires would be cut in half over 15 years, which would substantially break up the concentration of wealth and power of this small privileged class.” This implies that taxes would need to be raised on the middle class to keep these costly programs funded as private wealth vanishes among top earners and savers.
When evaluating the policy proposals of presidential candidates, it is easy to get caught up in the rhetoric and overlook the facts. Wealthy individuals are already paying a number of taxes on their income and wealth. Currently, business owners are faced with income taxes, capital gains taxes, state and local taxes, franchise taxes, and the estate tax. Adding a wealth tax to an already progressive system would mean even more taxation on hard-working people. Warren and Sanders claim that the wealth tax would only apply to the wealthiest 180,000 households in America, but the truth of the matter is that the top 1% simply does not have enough wealth to fund these campaign promises.
The estate tax, for example, imposes a 40% rate on an individual’s transfer of wealth at death. According to the Joint Economic Committee, the estate tax destroyed roughly $1.1 trillion in capital stock in the economy, destroying jobs and lowering wages. This is because wealth is hard to tax. Small- to medium-sized businesses that are considered asset-rich end up qualifying for the tax, but the estates of their owners lack the cash on hand to pay the death tax. This results in selling land, laying off workers, and often losing the business as a whole to the IRS. This illustrates how taxation on capital has a tendency to do more harm than good for the economy. The wealth tax would function much like the estate tax but would levy taxes annually.
The presidential candidates have appealed to many voters by guaranteeing new spending programs but offering incomplete details on how the programs will be paid for. As seen with the estate tax, taxation on assets is difficult to administer and tends to kill jobs and investment. If Warren and Sanders get their way, the result will be the dissolution of more small businesses and a less healthy economy.
Josie Gallagher is a Policy Analyst at the Family Business Coalition in Washington DC
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