Does America Need a Wealth Tax?

In response to the severity of income and wealth inequality in the U.S., presidential candidates have made calls for actions to close the widening gap between rich and poor. The two most progressive Democratic candidates - Elizabeth Warren and Bernie Sanders – have proposed new tax plans to impose increased income taxes on “ultra-rich” Americans. Wealth taxes could work in the US, bringing trillions of dollars to the US government, with the right implementations. However, it is crucial to deliberate what implications wealth taxes have on society, as well as the economy. 

While the middle class is still struggling to recover from the Great Recession, the rich have only been getting richer. According to the Census Bureau, the gap between the richest and the poorest U.S. households has hit a record high since 1967. The top three wealthiest Americans - Jeff Bezos, Warren Buffet, and Bill Gates- have more wealth than the bottom half of the country. Nonetheless, the current U.S. tax system is heavily in favor of the wealthy and corporations, only aggravating income inequality. 

The problems don’t end with income inequality - The 2017 Republican tax cut bill, contrary to Mnuchin’s previous claim that it would “cut down the deficits by a trillion dollars,” has led to a federal budget deficit of $779 billion in fiscal 2018, which was up 17 percent from the prior year. It turns out, US economic growth, as well as the average income increase in the median household, were higher during the high tax period than the low tax period. 

In an effort to alleviate the situation, Democrats are envisioning drastic overhauls to current tax laws. The central campaign goal of Senator Elizabeth Warren and Senator Bernie Sanders - seen as two of the most progressive candidates for the Democratic presidential nomination - is to impose wealth taxes on the rich. If implemented, a wealth tax could help close the gap between the rich and the poor. 

Senator Warren’s proposal to tax wealth, not just income, included a 2 percent tax on assets above $50 million and 3 percent above $1 billion. Sanders’ plan goes even further by taxing up to 8 percent for wealth above $10 billion, starting at 1 percent rate on all wealth greater than $32 million. According to Emmanuel Saez and Gabriel Zucman, economists at the University of California, Berkeley, these plans are expected to raise $2.6 trillion and $4.35 trillion, respectively, over a decade if implemented. 

However, even if Congress translates these plans into action, some individuals subjected to wealth taxes would invariably attempt to find loopholes to these new tax laws. The most obvious method would to simply take their assets and leave the country. Yes, both Sanders’ and Warren’s plans include an exit tax of 40 percent on the net worth on those renouncing US citizenship, but some will still choose this route to avoid the larger cost of taxes over time. We will have to consider the likelihood and cost of evasion. If wealth taxes lead to evasions, the possibility of raising an estimate of $4.35 trillion over a decade is questionable, and it might not be any better than current tax laws. Would wealth taxes even work in the US?

Skeptics of such proposed policies point out the failure many European countries have experienced with wealth taxes. France, Germany, and Sweden were among twelve countries that implemented wealth taxes in the 1990’s. All swiftly dropped their taxes, witnessing multiplicitous cases of evasion. For instance, IKEA founder Ingvar Kamprad, the richest man in Sweden, left the country in the early 1970’s to avoid wealth tax. In 2014, seven years after Sweden abandoned a wealth tax, he returned. Now, wealth taxes survive in only 3 European countries – Norway, Spain, and Switzerland. 

Advocates claim that the situation in the US is different. First, citizens of the United States cannot escape from tax liabilities simply by fleeing out of the country. Every US citizen, regardless of the country of his or her residence, must pay taxes to the Internal Revenue Services. On the other hand, European Union member states do not tax their nationals residing in foreign countries. So to avoid taxation, U.S. billionaires would have to revoke their U.S. citizenship. European wealth taxes also included various deductions and exemptions, which are unlikely under the plans of Warren and Sanders due to a much narrower population targeted for such taxes.

One serious concern with wealth taxes is the difficulty of asset valuation. To tax on wealth using the fairest method, we need a better measure to value assets with extreme volatility. Sanders’ plan provides the following guidance— “For assets that are difficult to appraise, the Treasury Department would have the option of allowing taxpayers to have appraisals done periodically instead of annually. The Treasury Department would establish the average rates of appreciation for several classes of assets. Those appraised only every few years would be assumed to appreciate in the intervening years at the average rate established for their designated class” — but the accuracy of measurement is questionable.

With such concern, wealth taxes could hurt the US economy by discouraging the healthy savings of the rich. Clearly, further research is required to establish the viability and efficacy of such programs, particularly before they are implemented at the national level.

Image Credit: Justin Sullivan / Getty Images

Author: Grace Kang
Editors: Matthew Takavarasha, David Casazza