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Memo For Elizabeth Warren – Wealth Taxes Don’t Work, Sorry, They Don’t

Egged on by Emmanuel Saez and Gabriel Zucman it seems that Elizabeth Warren is proposing an annual wealth tax on the richest Americans. The response to which is that wealth taxes don’t actually work. As the two Frenchmen proposing it should know, given that France has a wealth tax and it doesn’t in fact work. That it doesn’t work is why the standard economics of taxation says that we shouldn’t be trying to tax wealth. In fact, there are perfectly good analyses of this sort of taxation which insist that even the taxation rate of the income from wealth should be zero. Possibly, even subsidised.

More than this there’s the issue of the rate which is being proposed. It’s such a high rate that it really, really, won’t work. But then that’s demagogic politics for you, isn’t it?

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] 2020 presidential hopeful Sen. Elizabeth Warren, D-Mass., is proposing a new “wealth tax” on Americans with more than $50 million in assets, as well as other measures that include a significant hike in funding for the Internal Revenue Service. “We need structural change. That’s why I’m proposing something brand new – an annual tax on the wealth of the richest Americans. I’m calling it the ‘Ultra-Millionaire Tax’ & it applies to that tippy top 0.1% – those with a net worth of over $50M,” Warren, who sits on the left of her party, tweeted Thursday afternoon. [/perfectpullquote]

That tweet is here:

This is a fun little piece of obfuscation:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]The wealthy would still be able to enjoy the vast majority of their wealth. Saez and Zucman estimate that the top 0.1 percent will pay 3.2 percent of their wealth in taxes in 2019, and the wealth tax proposal would only increase that to 4.3 percent. Incidentally, the bottom 99 percent pays about 7.2 percent of their wealth in taxes, because they lack savings and rely heavily on labor income.[/perfectpullquote]

We don’t to any credible level of accuracy, currently tax wealth. Thus a comparison of taxes paid to wealth is an irrelevance. We do tax income so thus we should be comparing tax rates to income.

But here’s the big practical, not theoretical, reason why this won’t work. The tax is being set at more than the likely income from the asset. Thus the assets must be liquidated in order to pay the tax. Every rich person in the country is a net seller of their assets each and every year. The value of the assets is thus what? And the wealth that is being taxed is?

Think about it a bit. The dividend yield on the S&P 500 is about 2% at present. On Microsoft 2%, Oracle 1.7%. We’ve now got a 2% tax on mere decamillionaires, 3% on billionaires, for holding such stock. And out very complaint is that these rich b’stards own everything. So, what do they have to do to pay the tax? Sell stock.

Each and every year they’ve got to liquidate assets to pay the tax bill. And none of these other rich people can pick up the slack and buy them. This is going to do what to stock prices?

Quite, we’ve just engineered the mother of all stock market crashes through taxing capital assets at more than the income from holding them. They are, in cash flow terms, now valueless to any rich person. And no, there are no capital gains for them as we’ve just insisted that prices will be falling.

Wealth taxes don’t work anyway and high wealth taxes definitely don’t work. But then Liz Warren and taxes….

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Jonathan Harston
Jonathan Harston
5 years ago

If her advisors are French, they are severly lacking in knowledge of their own history – wealth taxes was one of the causes of the French revolution.

5 years ago

I suppose if you want to reduce wealth inequality there would be nothing like a huge stock market crash. Certainly, it would also hammer your 401k plan or distress your pension plan to no end, but surely it would reduce the wealth gap between you and Bill Gates. Admittedly, he’d still be pretty rich and you’d have a hammered 401k, but we’d finish up with a GINI coefficient more to Ms. Warren’s liking.

5 years ago
Reply to  TD

Yes. Sorting between stupidity and knowing malignancy. It’s hard and Hanlon’s Razor doesn’t really cope with politicians very well.

Dodgy Geezer
Dodgy Geezer
5 years ago

I wonder about calls for wealth taxes. I assume that the politicians making them are sufficiently well informed to know that they won’t work. And in any case the politicians making the call are no doubt hoping to become rich enough to attract the tax themselves. They can’t really want them… So there must be another reason that they call for them. I suspect that it’s a message to their voters. People vote for the Left because of a mixture of hate and envy, and calling for a punitive wealth tax will surely encourage such people to continue voting for… Read more »

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