It doesn’t make a poor man rich, but it does make great rhetoric.
Six European nations have a wealth tax, but the policy has never been seriously discussed in the United States—until now. Sens. Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.) have picked up the eat-the-rich banner and made dividing us against each other a cornerstone of their presidential campaigns.
A parody of Sanders, as portrayed by Larry David on “Saturday Night Live,” sums up his campaign promises as “free college, free health care, and free refills for all medium-size soft drinks.” Similarly, Warren thinks she can pay for that and more with a wealth tax. Warren says her plan would raise $3.75 trillion over 10 years. Sanders says his “tax on extreme wealth” would raise $4.35 trillion.
Warren’s “ultra-millionaire tax” would have a rate of 2 percent per year on wealth over $50 million, and 6 percent per year on wealth in excess of $1 billion. Her website says this tax would affect 75,000 households. The revenue raised would be used to pay for “Medicare for All,” student-loan debt relief, and universal child care. She says the wealth tax could provide the down payment on the “Green New Deal,” create 1.5 million jobs, and fund a housing program to bring down rents by 10 percent across the country.
While Warren seeks to fund a New Deal-style program to rebuild the middle class, Sanders has even more radical socialist goals: “Under this plan, the wealth of billionaires would be cut in half over 15 years, which would substantially break up the concentration of wealth and power of this small privileged class,” he said.
Sanders views the redistribution of wealth as an important economic and political goal, in addition to funding his large spending programs. His plan would apply to 180,000 households, more than double the number under Warren’s plan.
Wealth Tax Versus Income Tax
Socialist politicos such as Sanders have traditionally argued that the rich should pay higher income tax rates. On the surface, a wealth tax of 6 percent per year would seem to be less burdensome than an income tax of 30 percent a year.
Alan Viard, an economist with the American Enterprise Institute (AEI), says that this is deceptive. “Under a 30 percent income tax, tax equal to 30 percent of each year’s income would be paid each year and tax equal to 30 percent of each decade’s income would be paid each decade.”
That is not the case with a wealth tax. A 6 percent wealth tax would be paid the first year, “but a cumulative tax equal to 60 percent of wealth would be paid over a decade.” The impact should be obvious. A decade of Sanders’ wealth taxes would radically reduce the wealth of the 180,000 households in his gunsights.
Either wealth-tax plan would reduce savings and available capital for investment, and it would mark a significant move toward socialism. The U.S. economy, including common workers who need vibrant businesses to bid up wages, would be poorer as a result.
Sanders often likes to use Europe as an example for the United States to follow, but his wealth tax proposal is far more radical than anything even the Europeans have implemented. Belgium’s wealth tax is 0.15 percent; the Netherlands has rates from 0.61 to 1.61 percent; Norway has up to 0.85 percent; Italy’s wealth tax of 0.2 percent only applies to financial assets held abroad; Switzerland’s varies from canton to canton; and Spain’s varies from 0.2 to 2.5 percent, depending on the region.
Keep in mind, European taxes are filled with loopholes. If you live in Madrid, you don’t pay any Spanish wealth tax. The Dutch wealth tax excludes one’s primary residence, as well as substantial financial interests in companies.
Sweden and France gave up on their experiments with a wealth tax. Both had trouble with collection and enforcement, and many wealthy French and Swedes simply emigrated. In 2017, the French government estimated that “some 10,000 people with 35 billion euros worth of assets left in the past 15 years” for tax reasons. That was the end of France’s wealth tax.
A Financial Berlin Wall
Both Sanders and Warren have already reacted to the prospect of the rich heading for the exits. Warren would charge expatriates 40 percent on wealth over $50 million, while Sanders would demand 60 percent of the wealth of a billionaire who wants to flee.
In contrast to France or Sweden, the United States government is better positioned to collect a wealth tax from expatriates. If a French citizen leaves the country to work in neighboring Germany, he is under no obligation to pay taxes to France. On the other hand, the federal government claims the right to tax the income of U.S. citizens over the whole world. If a U.S. citizen wants to move abroad to escape U.S. taxes, he must first renounce his citizenship. Under the Warren and Sanders’ plans, this would trigger a 40 percent exit tax.
In addition, Warren and Sanders wish to increase the already formidable powers of the Internal Revenue Service, with more personnel and bigger budgets to process the returns of 75,000 and 180,000 households under the respective plans.
The exit tax—a virtual Berlin Wall—raises an obvious question about fundamental liberties, and it demonstrates the dangers of the mob ganging up on a minority. There already is an “expatriation” tax on people leaving U.S. jurisdiction, which hardly squares with the land-of-the-free moniker.
With shades of Argentina’s freeze on U.S.-dollar bank accounts in 2001–2002, Sanders and Warren want to gang up on a few people and make the burden on their departure even more punitive: How dare they find a better deal elsewhere! Those still in the United States can look forward to increased surveillance and even more complicated tax compliance.
A Pipe Dream?
The wealth tax faces two major hurdles. The first is constitutional, and court challenges could be its undoing.
“The Constitution required that all ‘direct’ federal taxes be apportioned among the states according to their population. If the wealth tax were apportioned, the tax rate would be lower in states with high per-capita wealth in order to equalize per capital liabilities across states,” AEI’s Viard said.
With that in mind, the advocates are already arguing that the wealth tax is an indirect tax. Would the Supreme Court with a conservative majority uphold it? The issue is so important that any wealth tax would surely be litigated to the nation’s highest court.
The second challenge is political. Sanders and Warren can count on fervent support from the progressive and hardline wings of their party, but there is less appetite in Congress. That could change, however. A public opinion poll early this year showed a surprisingly high 54 percent of Americans at least stated their support for a wealth tax. In line with the class-warfare dynamic, this was with a tax limited to 75,000 high-net-worth households, and some polls have shown even higher support.
Even if a Warren or Sanders candidacy has a slim chance of victory, their tax plans represent a dangerous and unsavory development for the United States. They’re attempting to broaden the Overton window to an idea that is deeply un-American and against individual property rights.
Fergus Hodgson is the founder and executive editor of Latin American intelligence publication Econ Americas. He is also the roving editor of Gold Newsletter and a research associate with the Frontier Centre for Public Policy.
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.