Sanders’ wealth tax is too much of a good thing

The Morning Call - - TOWN SQUARE - By Noah Smith

Awealth tax is a good idea. It at­tacks in­equal­ity di­rectly while rais­ing rev­enue for the gov­ern­ment. It can be tar­geted to­ward the coun­try’s wealth­i­est in­di­vid­u­als while leav­ing the up­per mid­dle class alone. And by adding an­other layer of tax­a­tion, it can tax peo­ple who man­aged to avoid in­come taxes through clever ac­count­ing tricks or il­le­gal eva­sion.

Demo­cratic pres­i­dent can­di­date Sen. El­iz­a­beth War­ren re­cently gar­nered at­ten­tion for propos­ing a wealth tax of 2% a year on for­tunes of more than $50 mil­lion, with an ad­di­tional 1% sur­charge for amounts over $1 bil­lion. It was a bold, pi­o­neer­ing pro­posal — much larger than any of the sim­i­lar taxes that Euro­pean coun­tries have ex­per­i­mented with (and mostly dis­carded) over the years.

Now Sen. Bernie Sanders, who also is seek­ing the Demo­cratic nom­i­na­tion, has taken War­ren’s pro­posal and sim­ply di­aled up the num­bers. His tax would in­clude five tiers:

If War­ren’s pro­posal was un­prece­dented, Sanders’s is revo­lu­tion­ary. His top rate of 8% would be more than twice that of Spain’s wealth tax, which is the world’s high­est, and many times that of Nor­way or Switzer­land.

If the goal of wealth tax­a­tion is sim­ply to shrink the num­ber of very wealthy peo­ple in the U.S., then this is a good plan. Many rich peo­ple would move them­selves or their for­tunes out of the coun­try in order to avoid such a con­fis­ca­tory level of tax­a­tion. Oth­ers would stay and pay the tax, and ac­cept a much di­min­ished level of af­flu­ence.

Sanders, true to pop­ulist form, ob­vi­ously thinks that sim­ply re­duc­ing the count of su­per-rich peo­ple in the U.S. is a wor­thy goal in and of it­self:

But if the goal is rais­ing rev­enue for gov­ern­ment spend­ing, the pic­ture be­comes a lit­tle more com­pli­cated. If rich peo­ple move them­selves and their money out of the coun­try, it de­prives the gov­ern­ment of the abil­ity to tax their for­tunes. Even if rich peo­ple stay, much of the re­duc­tion in their wealth will come not from ac­tu­ally pay­ing the tax, but from de­creases in the value of their as­sets, mainly fi­nan­cial hold­ings.

Wealth is mea­sured by the value of as­sets — stocks, bonds, real es­tate and so on — that a per­son owns. But the value of those as­sets is de­ter­mined in as­set mar­kets: If peo­ple are will­ing to pay $1,000 for a share of stock, that share of stock rep­re­sents $1,000 of wealth. But if the owner paid $1,000 and price goes to $500, half of that wealth has sim­ply van­ished.

A wealth tax would sub­stan­tially re­duce how much peo­ple are will­ing to pay for stocks and other as­sets. Since a rich per­son who owns the as­set would also have to pay the wealth tax, the value of the as­set goes down, re­duc­ing the amount of money the gov­ern­ment can raise. On top of that, own­ers of illiq­uid as­sets such as real es­tate will pay for those as­sets to be ap­praised at lower val­u­a­tions to re­duce their tax bills.

An­other way to see this is to think of wealth in real terms rather than in terms of dol­lars. Wealth is rep­re­sented by phys­i­cal things that bring value to hu­man life — houses peo­ple can live in, ma­chin­ery that can be used to make things and so on. Un­less Sanders man­ages to carry out a large-scale na­tion­al­iza­tion of land and in­dus­try — which could eas­ily wreak havoc on the econ­omy — most of that real phys­i­cal wealth will re­main in the hands of pri­vate in­di­vid­u­als. Some will have to be sold at a dis­count in order to pay the wealth tax, and this would de­crease in­equal­ity some­what. But much would re­main in the hands of the wealthy, who will hang onto their real as­sets and await the day that the tax is re­pealed or low­ered, as hap­pened in most of Europe.

In other words, wealth taxes are bet­ter at re­duc­ing in­equal­ity on pa­per than they are at re­dis­tribut­ing real wealth. And this be­comes more ap­par­ent as the taxes go from the mod­est lev­els that pre­vail in Switzer­land or Nor­way to the con­fis­ca­tory rates pro­posed by Sanders, and the wealthy re­sort to in­creas­ingly ex­treme tac­tics to pre­serve their for­tunes. The dif­fi­culty of rais­ing rev­enue via wealth tax­a­tion is the main rea­son most Euro­pean coun­tries aban­doned the pol­icy.

Very high wealth taxes could even hurt the broader econ­omy. If wealthy peo­ple in­vest their money over­seas, U.S. busi­nesses could be starved of cap­i­tal, cre­at­ing an in­vest­ment slow­down that would hurt Amer­i­can liv­ing stan­dards. A Sanders ad­min­is­tra­tion might try to re­spond with large-scale na­tion­al­iza­tion of in­dus­try, but this would likely com­pound the prob­lem.

Wealth taxes are a risky propo­si­tion. Even War­ren’s tax, which is more than dou­ble Switzer­land’s, was ex­tremely am­bi­tious; there was al­ways the pos­si­bil­ity that it would be too much and would have to be scaled back. Sanders’s tax, which is much higher than War­ren’s, seems en­tirely out­side the realm of pru­dent pol­icy. Wealth taxes are good, but so are cake and ice cream. It’s easy to go over­board.

Noah Smith is a Bloomberg Opin­ion colum­nist who was an as­sis­tant pro­fes­sor of fi­nance at Stony Brook Univer­sity.

SHUTTERSTO­CK

The writer sug­gests a wealth tax on the na­tion’s rich­est peo­ple may not bring in that much more rev­enue be­cause much of that wealth is tied up in as­sets such as this man­sion in New­port, Rhode Is­land.

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