Sure,Trump Proposed at 14.25% Wealth Tax – Because Trump Knows About Taxing Wealth

Donald Trump did indeed propose a 14.25% wealth tax for the United States – this being proof that Donald Trump actually knows something about the taxation of wealth. As opposed, say, to Matt Yglesias.

The important point about Trump’s wealth tax being that it accords with standard economic theory, in that it would be once and it would be unexpected. Which is why the IMF has flirted with the idea – but the point is again that such a tax must be once and it must be unexpected. The moment we start to say “Ooooh, Goodie!” and implement annual wealth taxes then the idea falls into the pit of ordure that is most populist economics.

This being what Matt Yglesias fails to grasp:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] Trump’s plan, as articulated during a 1999 flirtation with a Reform Party presidential bid, differed from Warren’s in three important respects. One, he wanted the tax to be a one-time levy that would reduce the national debt and therefore reduce interest service payments. That reduction in payments would be the enduring win for the middle class, while rich people would just pay the tax once and then forget it. Warren’s plan would simply levy a smaller tax each year. Two, he wanted a fairly hefty rate — 14.5 percent — that would have required a lot of rapid-fire liquidation of business assets. Warren’s rate structure is much lower than that. Three, he set the threshold for his tax lower. While Warren wants to tax fortunes worth more than $50 million, Trump proposed taxing wealth starting at $10 million. This was in 1999, and there’s been some inflation since then, but even in inflation-adjusted dollars, the Trump tax cutoff is a bit below $15 million. [/perfectpullquote]

The high rate is so that actually interesting revenue is raised, the first point, that it’s a once off, is why it would work. As Ken Rogoff points out:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] Should advanced countries implement wealth taxes as a means of stabilising and reducing public debt over the medium term? The normally conservative International Monetary Fund has given the idea surprisingly emphatic support. The IMF calculates that a one-time 10% wealth levy, if introduced quickly and unexpectedly, could return many European countries to pre-crisis public debt/GDP ratios. It is an intriguing idea. The moral case for a wealth tax is more compelling than usual today, with unemployment still at recession levels, and with deep economic inequality straining social norms. And, if it were really possible to ensure that the wealth levy would be temporary, such a tax would, in principle, be much less distortionary than imposing higher marginal tax rates on income.[/perfectpullquote]

A once off confiscation of assets already owned does not change future behaviour, thus there are no deadweight effects to the tax. A consistent tax upon assets does create deadweight effects as it does influence future behaviour – as, obviously, do income taxes. The difficulty is, of course, in ensuring that the tax is indeed a one off, a one time happening.

As to why it should be a surprise that’s obvious enough – give people enough time to prepare for the confiscation and you’ve just created your deadweights.

As to why Yglesias and others are making this point, well, we’re already into the next presidential election run so we’ve stopped having actual economic discussions about things and are back to the merely political. Whatever aids my side is the truth from now until mid-November 2020 sadly.