Leader: To Avoid the Pitchforks, Warren’s Wealth Tax


Our editorial opinion on Senator Warren’s proposed wealth tax.


In 2018, the three richest men in America held a combined wealth amounting to that of the total wealth held by the bottom half of Americans. [1] Economic inequality in America today has skyrocketed beyond levels seen in previous decades; this inequality lends itself to disillusion with political structures, discontentment with media sources, and polarized political discourse. Addressing wealth inequality has shaped up to be the pivotal challenge of political leaders in the 21st century. In late January 2019, presidential candidate Elizabeth Warren released a plan as a response to the growing economic disparities plaguing American society today; a wealth tax. In her plan, Warren proposes an annual tax of 2 percent on wealth greater than $50 million and a 3 percent levy on wealth exceeding $1 billion. [2] Subject to debate among scholars, billionaires and the general public, what would be the implications of a wealth tax? And, more importantly, why do a majority of Americans approve of it? [3]

Deconstructing the wealth tax

Warren’s ultra-millionaire tax and other wealth taxes of the like differ from the existing model of US federal taxation that primarily taxes income. A tax system based on income progressively taxes annual compensation, while a wealth tax is levied on the value of assets an individual may hold. 

Take Jeff Bezos for example, who (pre-divorce) was worth a staggering $120 USD billion. His formal salary as CEO and President of Amazon amounts to a little under $100,000 USD (for comparison, this is about the equivalent of a high school principal) [4] ; his massive wealth is based largely on his stock in Amazon, upon which he is not taxed unless he sells. 

In the United States, wealth inequality has greatly surpassed that of income as the nature of work and remuneration evolves. Wealth accumulation operates in a self-reinforcing way such that it benefits those who are already wealthy; high earners are able to invest more and in riskier assets. It is untaxed asset growth, such as Jeff Bezos’ Amazon stock, that allows the already wealthy to grow their wealth exponentially. 

What can we learn from France’s mistakes?

Taxing wealth as to prevent massive wealth accumulation is not a novel idea; local and state jurisdictions levy taxes on property (many households’ major asset) and inheritance. Warren’s wealth tax would be the first of its kind as a federal mechanism in the US, however, the US would not be the only country to dabble with a wealth tax. Spain, Portugal, and notably France have all experimented with wealth taxes with varying success. France’s wealth tax was implemented under Mitterrand in first from 1982-1986, then from 1988-2017. The program encountered a number of operational challenges, mainly that it reaped a paltry return (revenue from the tax only composed about 1% of France’s total revenue from all taxes) resulting from a mass exodus of France’s wealthy to Belgium. Consequently, the French state lost potential revenue from the wealth tax, but also existing income taxes. It is estimated that the induction of this tax resulted in a net loss almost twice as great as the revenue yielded by the wealth tax. [6] Ultimately, the program was rescinded under Macron’s mandate. [7] 

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A 2018 study conducted by the OECD found that the introduction of a form of wealth tax in 12 different OECD countries generally failed to effectively address wealth inequality for a handful of reasons. Firstly, the tax was unable to discriminate between people with high liquidity and those who were ‘paper rich’ but with little cash on hand, for example, many older individuals who possessed high-value art pieces or jewelry and who received small pensions were unable to pay their share. Moreover, it is logistically difficult to track and value an individual’s assets every year. Given these troubles, some countries established exemptions on certain items (e.g. France issued exemptions on artwork and antiques) which ultimately only served to incentivize investments into these industries as a form of shielding wealth from taxation. [8] Furthermore, capital flight was pervasive across countries, with some wealthy individuals relocating to the country over (as French millionaires did with Belgium) and some seeking tax shelters such as Monaco or the Cayman Islands. [9] 

Warren’s plan is different 

Warren’s plan, penned by Emmanuel Saez and Gabriel Zucman, two Thomas Piketty-trained economists, is designed with European cases in mind. Primarily, Warren’s proposed tax only levies taxes on wealth starting at $50 million USD [10]; i.e. the extremely rich (for comparison, France taxed households with personal assets amounting to €1.3 million and above (about $1.4 million USD)). [11] Further, Warren’s plan intentionally excludes exemptions as to prevent shielding wealth in the form of artwork, tigers, Birkin bags, Faberge eggs and other expensive items of the like. In terms of logistics, should Warren’s plan be successful, the expense of resources and personnel needed to oversee the implementation of such a project would represent a mere fraction of the potential income; a relatively cheap endeavor compared to the possible rewards. Additionally, Warren proposes a self-valuation system; households create an inventory of all of their assets and value each asset themselves. The government then has the right to buy any asset at the price listed, thus if someone intentionally undervalues an asset the government has the prerogative to purchase that asset for a price lower than it is actual worth. Moreover, the capital flight dilemma is mitigated by the fact that the US taxes its citizens wherever they are in the world; those seeking to evade the wealth tax would need to renounce their citizenship, in which case Warren proposes the federal government confiscate 40% of the individual’s wealth over one billion USD. [12]

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A Fair Share

There is certainly a political case to be made for a wealth tax, harkening back to the core philosophy of taxation. Taxes are levied as to facilitate a redistribution of wealth in such a way that benefits society’s common good. Simply stated, fostering a system of greater equality is in the best interest of American society. It may also be in the billionaires’ own interest given the state of wealth disparity in contemporary America, millionaires and billionaires to contribute a fair percentage of their extreme wealth to legitimize their large fortunes in a society where many face an increasingly unscalable ladder, and from which they benefit obscenely. Nick Hanauer, an entrepreneur and venture capitalist with a net worth of $1 billion USD [13] argues that rectifying the massive wealth disparity imbued American society today is a political imperative. Hanauer claims that concentration of wealth towards the 1% is growing at alarming rates that without government intervention, will produce destabilizing reactionary movements that will likely disrupt the established economic order, at everyone’s disadvantage. His case for the wealth tax is based self-preservation; Hanauer posits that a sacrifice of a marginal amount of enormous wealth is ultimately in his and other millionaires and billionaires’ best interest in order to prevent the overturn of the economic system upon which their success if contingent. [14] Warren’s wealth tax draws support from both sides of the equation; in June 2019, 18 billionaires including Hanauer signed an open letter in support of a wealth tax[15]. Moreover, a Morning Consult poll shows that Warren’s wealth tax is sitting at 61% approval rating in the electorate at large. 

Furthermore, wealth building has historically been an undertaking of non-racialized, non-marginalized people. Black Americans in particular have been historically subject to racist housing and educational policies.[17] The barriers to accessing social mobility have been insurmountably high for many.[18] As such, inequality today is often cut across racial lines; according to a recent study carried out by the Institute for Policy Studies, Jeff Bezos owns 44 million times more wealth than the median Black family and 24 million times more wealth than the median Latino family. In addition, the Forbes 400 richest Americans own more wealth than all Black households plus a quarter of Latino households.[19] Philanthropic endeavors of the ultra-wealthy are not enough; those at the bottom of the socio-economic ladder cannot rely on spontaneous acts of generosity of a few of the wealthiest citizens in order to live a dignified existence. Warren’s tax aims to redistribute funds to programs directly aimed to increase social mobility for racialized communities, such as her proposed Small Business Equity Fund with $7 billion USD in grants offered to entrepreneurs of colour. [20] Moreover, Warren’s predominant policy goal, MedicareforAll, will aid low-income communities. 

The question then turns to the political viability of such a policy if Warren is elected; many legal scholars raise concerns about the achievability of a wealth tax on the federal level without proposing a constitutional amendment (which, given the partisan nature of American society, would take massive political clout to pull off). Should the implementation of a wealth tax prove to be a truly untenable feat, the OECD’s report suggests that a combination of broad-based taxes on personal capital income (taxes on dividends, capital gains, interest) as well as well-designed inheritance taxes may also be possible solutions to close the wealth gap.[21] It is clear that no matter the approach, immediate action must be taken to address inequality, otherwise, as Nick Haneur aptly describes it, “the pitchforks are coming”. [22]

REFERENCES

[1] Editors of Inequality.org. ‘Wealth Inequality’. Inequality.Org, https://inequality.org/facts/wealth-inequality/. Accessed 26 Nov. 2019.

[2] Editors of ElizabethWarren.com. ‘Senator Warren Unveils Proposal to Tax Wealth of Ultra-Rich Americans | U.S. Senator Elizabeth Warren of Massachusetts’. Elizabeth Warren, https://www.warren.senate.gov/newsroom/press-releases/senator-warren-unveils-proposal-to-tax-wealth-of-ultra-rich-americans. Accessed 24 Nov. 2019.

[3] Claire Williams. ‘Warren’s Proposed Tax on Wealthy Draws More Support Than Ocasio-Cortez’s’. Morning Consult, 4 Feb. 2019, https://morningconsult.com/2019/02/04/warrens-proposed-tax-on-wealthy-draws-more-support-than-ocasio-cortezs/.

[4]  Alexi Horowitz-Ghazi, and Greg Rosalsky. Could A Wealth Tax Work? 929, https://www.npr.org/transcripts/744962126. Accessed 21 Nov. 2019.

[5] Sarah Perret. ‘The Role and Design of Net Wealth Taxes in the OECD’. OECD Tax Policy Studies, no. 26, Apr. 2018. Crossref, doi:10.1787/9789264290303-en.

[6] Noah Smith. ‘France Tried Soaking the Rich. It Didn’t Go Well.’ Bloomberg.Com, 14 Nov. 2019. www.bloomberg.com, https://www.bloomberg.com/opinion/articles/2019-11-14/france-s-wealth-tax-should-be-a-warning-for-warren-and-sanders.

[7] Chassany, Anne-Sylvaine. ‘Macron Slashes France’s Wealth Tax in pro-Business Budget’. Financial Times, 24 Oct. 2017, https://www.ft.com/content/3d907582-b893-11e7-9bfb-4a9c83ffa852.

[8] Sarah Perret. ‘The Role and Design of Net Wealth Taxes in the OECD’. OECD Tax Policy Studies, no. 26, Apr. 2018. Crossref, doi:10.1787/9789264290303-en.

[9] Alexi Horowitz-Ghazi, and Greg Rosalsky. Could A Wealth Tax Work? 929, https://www.npr.org/transcripts/744962126. Accessed 21 Nov. 2019.

[10]  Yglesias, Matthew. ‘Elizabeth Warren’s Proposed Tax on Enormous Fortunes, Explained’. Vox, 24 Jan. 2019, https://www.vox.com/policy-and-politics/2019/1/24/18196275/elizabeth-warren-wealth-tax.

[11] Chassany, Anne-Sylvaine. ‘Macron Slashes France’s Wealth Tax in pro-Business Budget’. Financial Times, 24 Oct. 2017, https://www.ft.com/content/3d907582-b893-11e7-9bfb-4a9c83ffa852.

[12] Alexi Horowitz-Ghazi, and Greg Rosalsky. Could A Wealth Tax Work? 929, https://www.npr.org/transcripts/744962126. Accessed 21 Nov. 2019.

[13] Nick Hanauer. Nick Hanauer Entrepreneur, Venture Capitalist, Civic Activist, Philanthropist, Author. https://nickhanauer.com/. Accessed 24 Nov. 2019.

[14] Hanauer, Nick. Beware, Fellow Plutocrats, the Pitchforks Are Coming. TEDSalon NY2014, 2014. www.ted.com, https://www.ted.com/talks/nick_hanauer_beware_fellow_plutocrats_the_pitchforks_are_coming.

[15] Nick, Hanauer, et al. ‘An Open Letter to the 2020 Presidential Candidates: It’s Time to Tax Us More’. Medium, 21 Sept. 2019, https://medium.com/@letterforawealthtax/an-open-letter-to-the-2020-presidential-candidates-its-time-to-tax-us-more-6eb3a548b2fe.

[16]Claire Williams. ‘Warren’s Proposed Tax on Wealthy Draws More Support Than Ocasio-Cortez’s’. Morning Consult, 4 Feb. 2019, https://morningconsult.com/2019/02/04/warrens-proposed-tax-on-wealthy-draws-more-support-than-ocasio-cortezs/.

[17] Lockwood, Beatrix. ‘The US Government Used These Maps to Keep Neighborhoods Segregated’. ThoughtCo, 30 July 2019, https://www.thoughtco.com/redlining-definition-4157858.

[18] Paul Buchheit. ‘The Economics of the New Jim Crow’. Inequality.Org, 25 June 2015, https://inequality.org/research/economics-jim-crow/.

[19]Editors of Elizabeth Warren.com. Leveling the Playing Field for Entrepreneurs of Color | Elizabeth Warren. https://elizabethwarren.com/plans/leveling-field-entrepreneurs-color. Accessed 26 Nov. 2019.

[20] Chuck Collins, et al. Dreams Deferred: How Enriching the 1% Widens the Racial Wealth Divide. Institute for Policy Studies, 2019.

[21] Sarah Perret. ‘The Role and Design of Net Wealth Taxes in the OECD’. OECD Tax Policy Studies, no. 26, Apr. 2018. Crossref, doi:10.1787/9789264290303-en.

[22]Nick, Hanauer, et al. ‘An Open Letter to the 2020 Presidential Candidates: It’s Time to Tax Us More’. Medium, 21 Sept. 2019, https://medium.com/@letterforawealthtax/an-open-letter-to-the-2020-presidential-candidates-its-time-to-tax-us-more-6eb3a548b2fe.

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