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Senator Warren’s Wealth Tax: A Study in Economic Ignorance

On February 2nd Senator Elizabeth Warren announced that she will join the Senate Finance Committee, the committee tasked with writing this country’s tax laws. She stated, “I’m very pleased to join the Finance Committee, where I’ll continue to fight on behalf of working families and press giant corporations, the wealthy, and the well-connected to finally pay their fair share in taxes.”

Warren has often advocated for a wealth tax in the past, especially during her campaign last year for the Democratic presidential nomination.  But now she is actually in a position to make proposed legislation happen. In fact, she’s promised that it will be her “first order of business.”  This is wrongheaded on many levels, including fairness, constitutionality, impossibility of implementation, history of failure, negative effect on the economy, and morality. 

Fairness:   Senator Warren has always maintained that corporations and the wealthy are not paying their “fair share”. She has never addressed the question of what that “fair share” might be. That is not surprising, since corporations and the wealthy in the US pay a far higher share of the tax burden than is paid in virtually every other country in the developed world – and by a wide margin. This results not from very high rates, but rather from the fact that our poor and middle class –  almost 50% of our population –  pay almost no income tax. According to the Tax Foundation’s 2021 data analysis, in 2018 (the most recent figures available),“the top 50 percent of all taxpayers paid 97.1 percent of all individual income taxes, while the bottom 50 percent paid the remaining 2.9 percent.” Additionally, “The top 1 percent paid a greater share of individual income taxes (40.1 percent) than the bottom 90 percent combined (28.6 percent).” To add a wealth tax on top of the already extremely progressive tax system would be anything but fair.

The grotesque unfairness of a wealth tax is even more evident when it is actually calculated. This can be seen by the following example: Assume that an investor with $100M net worth in the present low interest environment (and because not all of his wealth is appreciating assets) has an average rate of return of 4%. His income therefore is $4 million. The investor would pay an income tax rate of about 45% total combined federal/state/local taxes which would be $1.8 million in taxes. Now consider a 2% wealth tax tacked on, which would be an additional $2 million. This would mean the investor would pay a total of $3.8 in taxes and he would have an effective tax rate of 95%. What’s even more sobering is that if he earns less than 4%, or if his tax rate was more than 45% (which it will be with Biden’s plans), then the investor’s taxes would be in excess of 100%.

Constitutionality:    Our Constitution provides in Article 1, Section 9, Clause 4 that: “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.” 

Both our income tax and a wealth tax would run afoul of this provision. To make the income tax constitutional we had to add the 16th Amendment. But no such amendment exists for the wealth tax. It may be that wealth tax proponents would argue that this tax is somehow taxing income potential using wealth as a proxy. But no Supreme Court, other than an off-the-charts progressive one, would approve of such strained logic.  In fact, there’s currently a case before the Ninth Circuit Court of Appeals challenging Trump’s Mandatory Deemed Repatriation Tax on the ground that it is, in fact, an unconstitutional wealth tax.

Implementation:  Taxing someone’s wealth requires determining the fair market value (“fmv”) of his or her assets, and then (presumably since no details are currently available) subtracting all liabilities. For anyone of considerable wealth, this would be an extraordinarily expensive, time consuming, and complicated effort. Even for assets that might have a publicly available market for valuation, it isn’t that simple. Consider volume. If someone has a substantial amount of something, you normally would apply a discount, since selling large volumes of assets can upset the market and reduce the overall value of an item.

But not everything has a value that can be determined easily. Investment in a closely held business, or real estate, or even paintings are examples of assets that are not susceptible to easy valuation on an annual basis, making it not very economically feasible to try to do so. Additionally, valuation can be determined in any number of ways — such as appraisals, discount rates, and reductions in the lack of marketability– so that valuations may be varied.

Another factor that makes valuations difficult are contingencies. For example, many assets have contingencies backed up with guarantees, and it’s difficult to value those contingencies. Finally, there is a question of liquidity/ability to liquidate or pay. Most people who have extraordinary assets like that often don’t have sufficient income or liquid assets to pay a wealth tax on them. Since many assets are not easily marketable, there could be a liquidity crunch.

Of course, a wealth tax would add even more burdensome complexity to the already byzantine tax code. The IRS would have to substantially increase its number of  agents and its budget just to have the manpower to devote to compliance and enforcement. Given the IRS’s history of being discriminatory and incompetent, this is not a good thing. 

Failure:  It should also be noted that the wealth tax has already been tried — and failed — repeatedly.  At one point, 15 European countries had a wealth tax. To date, all but four nations have since repealed it because it was ineffective in accomplishing its goals and was extraordinarily complicated and expensive to administer. Additionally, the wealth tax induced capital flight and asset hiding.  For instance, in 2017 France decided to abandon its wealth tax after it caused the loss of “10,000 people with about 35 billion euros ($41 billion) in capital abroad” over a 15 year period according to the Prime Minister.  Likewise, Switzerland — one of the four remaining wealth tax countries — experienced substantial tax evasion, noting that a mere “.1% wealth tax lowers reported wealth by 3.4%” according to a study by the National Bureau of Economic Research. As Switzerland has a wealth tax rate of 1%, that amounts to 34.5%  in unreported assets.

Effect on the Economy:  The growth of our economy is dependent on putting capital to productive use. Every time a corporation reinvests its retained earnings, or an individual puts his wealth to work by investing in an ongoing or new venture, the economy grows. This growth results in new purchases of equipment, facilities, hiring of employees, research and development, etc. Conversely, when capital is removed from the economy, such as by requiring the payment of a wealth tax, the economy shrinks. In fact, the wealth tax is a form of double taxation. Wealthy Americans already pay  taxes on their income; under a wealth tax, they would then be taxed again for keeping that income in various assets. This not only punishes success, but discourages investment and savings.

Though progressives may argue that the capital taken out of circulation will be used to redistribute income to those who will spur the economy by consuming those funds, we revert back to Economics 101 – consumption has a much smaller effect on the economy than investment.

Morality:    There is no moral justification to take something from someone just because they have it, even if they have a lot of it. One is reminded of the great scholar Thomas Sowell, who understands this quite well: “Since this is an era when many people are concerned about ‘fairness’ and ‘social justice,’ what is your ‘fair share’ of what someone else has worked for?” The wealthy in this country are an extraordinarily charitable group. But it should be their choice as to how charitable they wish to be with their hard-earned assets. 

Senator Warren has argued that a real benefit of this tax is that it will only affect a relatively small number of people. This reveals what this tax really is – an attempt to foment class warfare by giving a large number of people (read: voters) a benefit through confiscating substantial amounts of money from a small group. 

A wealth tax will certainly not bring in the revenue expected by the progressives – who relish the thought of punishing wealthy Americans in order to throw more money at their failed policies. Wealth redistribution is inherently the antithesis of the American Dream. Bastiat was right. No matter how you spin it, explain it, try to justify it, a wealth tax is simply “legal plunder.” Perhaps Senator Warren is being disingenuous (since the wealth tax would never be passed) but she will nevertheless score political capital among her constituents who do not know any better.  She is taking advantage of the lack of economic knowledge among people who don’t understand the complexity and stupidity of a wealth tax. 

Must Read: Thomas Sowell on “Is Thinking Now Obsolete?”

Thomas Sowell is one of the greatest minds of today. His latest essay entitled “Is Thinking Now Obsolete?” is exemplary: I have reposted it in its entirety below:

“Some have said that we are living in a post-industrial era, while others have said that we are living in a post-racial era. But growing evidence suggests that we are living in a post-thinking era.

Many people in Europe and the Western Hemisphere are staging angry protests against Israel’s military action in Gaza. One of the talking points against Israel is that far more Palestinian civilians have been killed by Israeli military attacks than the number of Israeli civilians killed by the Hamas rocket attacks on Israel that started this latest military conflict.

Are these protesters aware that vastly more German civilians were killed by American bombers attacking Nazi Germany during World War II than American civilians killed in the United States by Hitler’s forces?

Talk-show host Geraldo Rivera says that there is no way Israel is winning the battle for world opinion. But Israel is trying to win the battle for survival, while surrounded by enemies. Might that not be more important?

Has any other country, in any other war, been expected to keep the enemy’s civilian casualties no higher than its own civilian casualties? The idea that Israel should do so did not originate among the masses but among the educated intelligentsia.

In an age when scientists are creating artificial intelligence, too many of our educational institutions seem to be creating artificial stupidity.

It is much the same story in our domestic controversies. We have gotten so intimidated by political correctness that our major media outlets dare not call people who immigrate to this country illegally “illegal immigrants.”

Geraldo Rivera has denounced the Drudge Report for carrying news stories that show some of the negative consequences and dangers from allowing vast numbers of youngsters to enter the country illegally and be spread across the country by the Obama administration.

Some of these youngsters are already known to be carrying lice and suffering from disease. Since there have been no thorough medical examinations of most of them, we have no way of knowing whether, or how many, are carrying deadly diseases that will spread to American children when these unexamined young immigrants enter schools across the country.

Are you worried about Ebola breaking out in the U.S.? Sound off in the WND Poll.

The attack against Matt Drudge has been in the classic tradition of demagogues. It turns questions of fact into questions of motive. Geraldo accuses Drudge of trying to start a “civil war.”

Back when masses of immigrants from Europe were entering this country, those with dangerous diseases were turned back from Ellis Island. Nobody thought they had a legal or a moral “right” to be in America or that it was mean or racist not to want our children to catch their diseases.

Even on the less contentious issue of minimum wage laws, there are the same unthinking reactions.

Although liberals are usually gung ho for increasing the minimum wage, there was a sympathetic front-page story in the July 29 San Francisco Chronicle about the plight of a local nonprofit organization that will not be able to serve as many low-income minority youths if it has to pay a higher minimum wage. They are seeking some kind of exemption.

Does it not occur to these people that the very same thing happens when a minimum wage increase applies to profit-based employers? They, too, tend to hire fewer inexperienced young people when there is a minimum wage law.

This is not breaking news. This is what has been happening for generations in the United States and in other countries around the world.

One of the few countries without a minimum wage law is Switzerland, where the unemployment rate has been consistently less than 4 percent for years. Back in 2003, The Economist magazine reported that “Switzerland’s unemployment neared a five-year high of 3.9 percent in February.” The most recent issue shows the Swiss unemployment rate back to a more normal 3.2 percent.

Does anyone think that having minimum wage laws and high youth unemployment is better? In fact, does anyone think at all these days?”

Stephen Moore and the Fallacy of “Fair Share”


I just read Stephen Moore’s new book “Who’s the Fairest of Them All? The Truth About Opportunity, Taxes, and Wealth in America“. Thomas Sowell gave it a nod last week when he wryly observed,

If everyone in America had read Stephen Moore’s new book, “Who’s The Fairest of Them All?”, Barack Obama would have lost the election in a landslide. The point here is not to say, “Where was Stephen Moore when we needed him?” A more apt question might be, “Where was the whole economics profession when we needed them?” Where were the media? For that matter, where were the Republicans?

Indeed. This book does a great job in a little over 100 pages of expelling the myth that “the rich need to pay their fair share” by showing with quantitative data that cutting taxes spurs economic growth, and that tax cuts increase tax revenue collection. These are some of the very topics I’ve written about before on this site.

We need to let the “Bush tax cuts” continue. Except that they really aren’t the Bush tax cuts anymore — they’ve been the law for 10 years. Let’s stop pretending they are “very temporary” and either extend them again long term or else make them permanent.

We also need to overhaul the tax code. With the IRC reforms of 1986, Reagan reduced the tax rates to 28% in exchange for getting rid of the tax shelters. As a result, the amount of federal income collected was more at 28% and a clean tax code than at 91% and tax shelters, because at 28%, it really wasn’t worth the time, cost, and effort to hide money.

We need comprehensive tax reform, but not the type that Obama is pushing. His policies of more “tax credits” (which is government spending run through the tax code) and marginal rate increases hampers our recovery. If the federal tax rates are going to rise again – and they will, unfortunately, if Obama has his way – in addition to state and local tax hikes, the tax burden in this country will be staggering. People will do one of two things: 1) start finding ways not to pay it like they did when the rates were outrageous or 2) stop working and investing so much because it’s just going to get taken away from them. When that happens, the economy worsens — and it is already suffering enough. We need to simplify the tax code.

Back to the book — I would heartily recommend it, and also check out Sowell’s overview of it.