Supposedly, Willie Sutton was asked why he robbed banks. His answer was a classic: “Because that’s where the money is!” With a trillion-dollar budget deficit and a great need for things such as health care and infrastructure improvements, where do we get the money? For two Democratic candidates for president, the answer is straightforward: from the wealthy, through a wealth tax, because that is where the money is.
First, why are there proposals to tax wealth? The argument is that the very rich have gotten a lot richer but the rest are not doing well and that has created massive inequality in the nation.
The data support that point.
Over the last 30 years, there has been a massive redistribution of wealth from the middle and bottom classes toward the top.
Using the Federal Reserve’s quarterly Distributional Financial Accounts, the top 1 percent had 23.9% of total net worth in the third quarter of 1989. The next 9 percent owned an additional 37%. Thus, the top 10 percent owned 60.9% of net assets about 30 years ago.
By the third quarter of 2019, the top 1 percent’s share had risen to 32.2%, with most of that gain occurring in the last 10 years. The next 9 percent’s share increased to 37.4%, taking the total to 69.6%, a nearly 9 percentage-point rise. The wealthy are getting very wealthy.
In comparison, the middle 40 percent’s share fell from 35.4% to 28.9%, while the lowest 50 percent dropped from 3.7% to just 1.6%. The “bottom” 90%, which had owned 39.1% of the wealth in 1989, saw its share decline to just 30.4% in 2019.
Others have presented the data differently, but regardless of how they are parsed, the concept holds that wealth is being concentrated at the very top.
So, if you are looking for ways to raise money for programs or to reduce the skyrocketing budget deficit, taxing the wealthiest makes sense because that’s where the money is.
And that’s what two of the leading candidates, Warren and Sanders, have suggested.
What is a wealth tax? It is a special tax levied not on income but on wealth.
Sen. Warren (https://elizabethwarren.com/plans/ultra-millionaire-tax) defines wealth in a standard way: “All household assets held anywhere in the world will be included in the net worth measurement, including residences, closely held businesses, assets held in trust, retirement assets, assets held by minor children, and personal property with a value of $50,000 or more.”
The tax plans of Warren and Sanders differ in tax levels and brackets. In both, the tax rate would increase as the level of wealth rises.
In the Warren plan, there is no tax on the first $50 million while in the Sanders plan the first $32 million is exempted. Ninety-nine percent of the households will not have their wealth taxed.
The Sanders plan (https://berniesanders.com/issues/tax-extreme-wealth/) would start with a 1 percent tax on net worth above $32 million for a married couple. The tax rate would increase in 1 percent increments until it hits 8 percent on wealth over $10 billion. The brackets are halved for singles.
Warren’s plan is simpler: It begins with a 2% annual tax on household net worth between $50 million and $1 billion and ends with a 4% annual Billionaire Surtax (6% tax overall) on household net worth above $1 billion.
How much revenue will be raised is under debate, not surprisingly. Warren claims her tax will raise $3.75 trillion over 10 years, while Sanders says his tax will add $4.35 trillion over the same period. The Tax Foundation, a conservative think tank, estimated that those totals would look more like $2.2 trillion for Warren and $2.75 trillion for Sanders.
The best approach is to assume revenues would rise somewhere in between, or roughly $3 trillion to $3.6 trillion. That’s a lot of money.
As with all tax changes, there would be impacts on things such as capital formation and economic growth. How much, though, is terribly unclear.
Finally, there is one large potential problem with the wealth tax: It might be unconstitutional. This stems from an arcane section in the Constitution that legal scholars are debating. Thus, if a wealth tax is implemented, it will likely wind up in the Supreme Court.
So, what should we make of the wealth tax? It is one way to address the reality that the economy rewards the few significantly more than the many and that disparity is widening. The nation’s low and the middle class are losing shares while the very top is getting significantly wealthier.