A
group of wealthy Americans have been urging the US presidential candidates to tax
them more. “The next dollar of new tax revenue should come from the most
financially fortunate, not from middle-income and lower-income Americans,” they
said.
The
group pointed out that a wealth tax could help address the climate crisis,
improve the economy, improve health outcomes, fairly create opportunity, and
strengthen the democratic freedoms. Instituting a wealth tax is in the interest
of the republic.
Several
candidates for President, including Senator Elizabeth Warren, Mayor Pete
Buttigieg, Representative Beto O’Rourke, and Representative Tim Ryan are
already supportive of the idea. In January 2019, Senator Warren proposed to raise
taxes on American households with a net wealth greater than $50 million, which
would only affect 75,000 of the wealthiest families in the country. The
proposal is straightforward: It puts in place a tax of 2 cents on the dollar on
assets after a $50 million exemption and an additional tax of 1 cent on the
dollar on assets over $1 billion. It is estimated to generate nearly $3
trillion in tax revenue over ten years.
The
Brookings paper, written by economists Emmanuel Saez and Gabriel Zucman — who
are also Warren’s economic advisors addresses some of the key criticisms of
Warren’s proposal:
1.
Wealth taxes have failed in Europe
14
European countries had a wealth tax in 1996, but eight of the countries abandoned
them by 2019. Saez and Zucman argue that the wealth tax repealed in Europe were
the result of poor policy choices. Due to low exemption thresholds, European
wealth taxes were levied on households with little cash but substantial
illiquid wealth. To avoid this problem, Elizabeth Warren has included an
exemption threshold of $50 million in her wealth tax proposal, which is 50
times higher than the typical European wealth tax.
2.
Tax evasion problem
Saez
and Zucman note that the passage of the Foreign Accounts Tax Compliance Act
(FATCA) puts the U.S. in a better position, compared with Europe to combat this
problem. The authors also recommend requiring third parties like financial
institutions, instead of household self-reporting to inform wealth balances to
the IRS.
3.
Reduction in the capital stock or a decrease in innovation
By
using the tax revenue to fund Warren’s projects, wealth inequality will
stabilize. Saez and Zucman argue that reduction in capital stock could be
offset by increasing savings from the rest of the population and the government.
In terms of the effects on innovation, Saez and Zucman reason that most
innovation is produced by young, not wealthy individuals (the wealthy tend to be
much older than average), who would not be impacted by a high-exemption wealth
tax. Moreover, Saez and Zucman argue that established businesses spend
resources protecting their dominant market positions which reduces innovation.
As a result, a wealth tax that only collects taxes from established business
owners could increase competition and thus innovation.
Saez
and Zucman pointed out that the greatest injustice of the US tax system today
is its regressivity at the very top: billionaires in the top 400 pay less
(relative to their true economic incomes) than the middle class. Of about 40
countries, the US is the sixth highest in terms of wealth concentration,
according to data from the Organization for Economic Co-operation and
Development.
The
super-wealthy who have signed the open letter believe that by taxing them the wealth
inequality could be slowed down. The wealth tax would be a key to both
addressing climate crisis, and a more competitive, stronger economy that would
better serve millions of Americans.
Reference:
1.
An Open Letter to the 2020 Presidential Candidates: It’s Time to Tax Us More,
24 June 2019
3.
Kate Patrick, Economists Weigh Whether Elizabeth Warren’s Wealth Tax Would
Actually Work www.insidesources.com
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