Skip navigation
elizabeth-warren-2019-campaign.jpg Mario Tama/Getty Images News/Getty Images
U.S. Elizabeth Warren

The Holes in Warren’s Wealth Tax Can’t Be Plugged

The senator’s Democratic rivals need to seize the chance to point this out.

(Bloomberg Opinion) -- Elizabeth Warren’s proposed wealth tax on the most well-off Americans is very popular, according to several opinion polls taken in the months since she announced her idea. But her fellow Democratic politicians — both in Congress and in the party’s presidential race — have largely seemed to remain cool to her idea. Why is that?

It may be for political reasons, as an article last month in the Hill suggested: A number of Democrats have their own plans to collect more revenue from the top tier of taxpayers. Others may be wary of embracing Warren’s signature plan lest it be seen as an endorsement of her presidential bid.

I hope this absence of enthusiasm is at least in part because Democratic leaders know just how flawed and unrealistic the whole thing is.

Let’s back up. What does she propose? The federal government already taxes income, which is the flow of financial resources a household receives in, say, a given month. For example, your paycheck. Warren’s plan would augment the existing income tax by adding a tax on wealth. (For example, the balance in retirement accounts.)

The tax would apply to fortunes above $50 million, hitting them with a 2% annual rate; there would be a surcharge of 1% per year on wealth in excess of $1 billion. Economists advising her estimate that this tax on 75,000 families would raise $2.75 trillion in revenue over a 10-year period.

Not only would such a tax be very hard to administer, as many have pointed out. It likely won’t collect nearly as much revenue as Warren claims.

The U.S. estate tax system already finds it challenging to determine wealth once in a person’s lifetime (at the time of death). Under Warren’s proposal, the fair market value of all assets for the wealthiest 0.06% of households would have to be assessed every year. It would be difficult to determine the market value of partially held private businesses, works of art and the like every year.

This helps to explain why the number of countries in the high-income OECD that administer a wealth tax fell from 14 in 1996 to only four in 2017. (Or six, if you include the nonstandard wealth taxes in the Netherlands and Italy.)

It is highly unlikely that the tax would yield the $2.75 trillion estimated by Emmanuel Saez and Gabriel Zucman, the University of California, Berkeley, professors who are Warren’s economic advisers. Lawrence Summers, the economist and top adviser to the last two Democratic presidents, and University of Pennsylvania professor Natasha Sarin used a different methodology based on the U.S.’s experience with the estate tax. They convincingly argued Warren’s plan would bring in a fraction of what Saez and Zucman expect once real-world factors like tax avoidance and the loopholes that Congress would be likely to add are factored in.

Another reason to doubt such a high revenue estimate is that Saez and Zucman are likely relying on an inflated wealth base. In a paper released in July, economists Matthew Smith, Owen Zidar and Eric Zwick present preliminary estimates suggesting that the Warren proposal would raise half as much as projected. They find the share of wealth held by the top 1%, top 0.1% and top 0.01% falls by 20%, one quarter and one third, respectively, relative to the Saez-Zucman estimates.

Importantly, they also estimate a larger role for private business holding among high-wealth households. Less than half of wealth at the top consists of securities with clear market values. The need to value these assets would make Warren’s plan difficult to execute.  

Many legal scholars believe the idea might be unconstitutional because “direct taxes,” other than income taxes, must be apportioned among states according to their populations. (My Bloomberg colleague Noah Feldman views it as a tough call, but concludes the tax probably is constitutional.) Why would Democrats want to risk adopting a tax that would trigger years of litigation and might be struck down?

With wealth taxes, small numbers have big effects. In Warren’s case, a household worth $50 million would lose 2% of its wealth every year to the tax, or 20% over the first decade. For an asset yielding a steady 1.5% return, a 2% wealth tax is equivalent to an income tax of 133%. (At this writing, the yield on the benchmark 10-year Treasury note was 1.5%.)

And remember that the wealth tax would operate along with the existing income tax system. The combined (equivalent income) tax rate would often be well over 100%. Underlying assets would routinely shrink.

This may be the advocates’ goal. If so, it is misplaced. The tax would likely reduce national savings, resulting in less business investment in the U.S. or larger capital inflows from abroad to meet investment needs. Less investment spending would reduce productivity and wages to some extent over the longer term. Larger inflows of foreign capital would reduce national income relative to what the U.S. produces. The tax would also discourage risk taking and the incentives for potential innovators. It would be better to find extra revenue by closing deductions and exemptions in the income tax code, or by taxing consumption or pollution.

The ostensible purpose of the wealth tax would be to finance the expanding entitlement state the Democrats want — the Green New Deal, Medicare for All, free college, universal child care, student debt forgiveness. According to Saez and Zucman, another aim would be to reduce the political power of the wealthiest households. They argue that the “root justification” for high tax rates “is not about collecting revenue.” Instead, “they aim at preventing an oligarchic drift that, if left unaddressed, will continue undermining the social compact and risk killing democracy.”

I am not such a purist as to think that the only purpose of taxation should be to collect revenue — for example, I support tax credits for low-income households to encourage labor force participation and to fight poverty. But the “save democracy” approach is a bad use of the tax code.

For one, it won’t work. You need a lot less than $50 million to be politically influential. And influence is much more diffuse than the plan’s advocates seem to think.

Warren’s wealth tax would be an abuse of government power. It is the tax-code equivalent of looting mansions. What is wrong with the way these 75,000 families made their money? Why should we have special tax rules for a tiny fraction — 0.06% — of households?

Paying taxes is not a punishment, and the tax code should not be used to penalize any group of citizens. Not even the very rich.


To contact the author of this story:
Michael R. Strain at [email protected]

To contact the editor responsible for this story:
Katy Roberts at [email protected]

Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.