Analysts at the University of Pennsylvania found that the wealth tax proposed by Sen. Elizabeth Warren (D-Mass.) would raise at least $1 trillion less than what her campaign claims, calling into question a key source of funding for her generous spending plans such as government-run health care.
In addition to the shortfall, which Warren’s campaign argues could be narrowed through tougher enforcement, the Penn Wharton Budget Model (PWBM) also projected a GDP contraction of between 1 and 2 percent, “depending on how the money is spent.”
Richard Prisinzano, PWBM’s Director of Policy Analysis, explained that the model first established the taxable wealth base and then applied the tax code to account for various tax avoidance measures. The team then estimated that Warren’s proposed Ultra-Millionaire Tax, if implemented in 2021, “would raise between $2.3 trillion (including macroeconomic effects) and $2.7 trillion (not including macroeconomic effects) in additional revenue in the 10-year window 2021-2030.”
By contrast, Warren’s campaign estimated that “the small tax on roughly 75,000 households will bring in $3.75 trillion in revenue over a 10-year period.”
While the Wharton model shows a significant shortfall compared to Warren’s projections, the tax revenues would still be substantial.
“This is not nickels and dimes, even in our estimate,” Kent Smetters, who runs the model at the University of Pennsylvania, told The Wall Street Journal. “It’s nothing to sneeze at.”
As regards tighter enforcement, Warren’s campaign calls for measures that include a significant increase in the IRS enforcement budget, a minimum audit rate for taxpayers subject to her wealth tax, and “a 40 percent ‘exit tax’ on the net worth above $50 million of any U.S. citizen who renounces their citizenship” to discourage people from offshoring their assets.
The Wharton report also found that Warren’s wealth tax would have a negative knock-on effect on the average hourly wages, which are projected to fall between 0.8 percent to 2.3 percent. The drop would be “due to the reduction in private capital formation.”
Warren’s is the most aggressive tax-the-rich scheme in the field of Democrats vying for their party’s nomination for the opportunity to oust President Donald Trump in the 2020 presidential election. Initially, her proposed Ultra-Millionaire Tax targeted net worth of between $50 million and $1 billion with a 2 percent tax, while wealth above $1 billion would be taxed at 3 percent. That model has since been adjusted upwards with a “4 percent annual Billionaire Surtax (6 percent tax overall) on household net worth above $1 billion.”
“Elizabeth originally proposed a wealth tax of 2 percent on wealth between $50 million and $1 billion, and a 3 percent tax on wealth above $1 billion. On Nov. 1, 2019, Elizabeth proposed an additional 3 percent surtax on wealth over $1 billion—bringing the total annual rate to 6 percent on every dollar over $1 billion—which generates an additional $1 trillion in revenue,” her campaign said.
A simulation on her campaign website shows that a hypothetical “heir with a net worth of $20 billion” would pay a “2 percent tax on the $950 million between $50 million and $1 billion, and a 6 percent tax on the remaining $19 billion, for a total annual liability of $1.16 billion.”
In another example, a hedge fund manager with a net worth of $500 million would pay a “2 percent tax on the $450 million in net worth above the $50 million threshold, producing a total annual liability of $9 million.”
Legal scholars are debating whether a U.S. federal tax on net worth would violate the Constitution.
While it would be novel in the United States, a wealth tax has been tried in other countries. According to the Wharton report, in 1990, 12 of the 36 member countries in the Organization for Economic Cooperation and Development (OECD) imposed wealth taxes. By 2019, this number shrank to Norway, Belgium, Spain, and Switzerland.
“An OECD review concluded that administrative difficulties, modest revenues, and failure to adequately address wealth inequality are among the main reasons why most member countries have abandoned wealth taxes,” the report said.
‘Ragged Edge of the Middle Class’
The 70-year-old U.S. senator from Massachusetts is a leader of the party’s progressive wing and has focused her presidential campaign on a populist anti-corruption message, promising to fight what she calls a rigged system that favors the wealthy.
Warren’s pitch is for “big, structural changes” to the economy to help Americans pushed to the “ragged edge of the middle class” and who “can barely breathe” after “decades of largely flat wages and exploding household costs.”
Experts contend that her perspective overlooks the facts about how well the economy is performing.
Lee Ohanian, economics professor at UCLA and senior fellow at the Hoover Institute, says Warren’s type of rhetoric, such as dismissing the strength of the economy by arguing that higher-equity values only benefit the wealthy, is misleading.
“More than half of Americans indirectly hold stocks through various retirement plans. Moreover, higher stock values promote business expansion and economic growth. Real GDP growth averaged 2.1 percent under Obama but is averaging around 2.9 percent under Trump,” Ohanian wrote in an op-ed.
“With the lowest unemployment rate in about 50 years, and the strongest real GDP and productivity growth in about 20 years, there is no doubt that this is one of the best economies we have had in a long time,” he added.
Warren, a former Harvard bankruptcy law professor, has also vowed to reverse parts of the Trump tax cut, though she has not specified how much of it she would repeal.
According to Forbes contributor and licensed CPA Tony Nitti, “Warren has proposed repealing enough of the Tax Cuts and Jobs Act to raise another $1 trillion of revenue.” In his deep dive into Warren’s tax plan, Nitti says it’s not clear where that revenue would come from but notes that it’s “likely that she intends to cut corporate deductions or repeal the new 20 percent deduction against pass-through income earned by sole proprietors, S corporation shareholders, and partners in partnerships.”
Warren has also proposed a Real Corporate Profits Tax scheme, which would apply to companies that report more than $100 million in profits. Last year, this was around 1,200 companies.
“That first $100 million is left alone, but for every dollar of profit above $100 million, the corporation will pay a 7 percent tax,” Warren said. “That means Amazon would pay $698 million in taxes instead of paying zero. And Occidental Petroleum would pay $280 million in taxes instead of paying zero.”
She said economists Saez and Zucman estimate her Real Corporate Profits Tax scheme will bring in $1 trillion in revenue over the next 10 years.
Wall Street Investors Slam Warren’s Policies
Some Wall Street investors and Democratic donors have sharply criticized Warren’s policies on issues from taxation to affordable healthcare because they are impractical.
Speaking at the Reuters Global Investment Outlook 2020 Summit, several investors said, however, they were not too worried by a potential Warren presidency because many of her plans would struggle to pass what is likely to be a divided Congress.
“Her policies scare the heck out of every wealthy guy I know,” said Mike Novogratz, CEO of Galaxy Digital, which invests in cryptocurrency and blockchain. But he added, “They don’t scare me as much because I don’t think they’re practical.”
While cool on Warren’s specific policy proposals, several donors and investors credited her political savvy and financial knowledge, and agreed that policymakers needed to confront rising income inequality or face long-term adverse social and economic repercussions.
But many questioned whether Warren’s proposals would successfully address these issues, saying they feared her plan to fund trillions of dollars in social projects through a range of taxes could have unintended adverse consequences, such as reducing economic growth or dampening the stock market.
“Senator Warren is saying things that are difficult to enact, and I don’t know how you end up paying for them,” said Marc Lasry, chairman at Avenue Capital Group, who has donated to several of Warren’s opponents for the Democratic nomination.
Reuters contributed to this report.