6 Reasons Why Elizabeth Warren’s Wealth Tax Won’t Work

 September 24, 2019

In this age of rampant government spending, new ways to secure funding often receive a lot of attention, particularly when they won’t cost the majority of Americans anything directly.

Elizabeth Warren’s proposed wealth tax, a 2% annual tax on assets valued over $50 million and 3% over $1 billion, has been a topic of discussion of late. But will it succeed in stemming the tide of debt?

As with any dramatic shift in policy, such a proposed tax requires a lot of scrutiny. While it can be difficult to predict the impact tax changes will have, one method is to compare the tax to similar policies put in place elsewhere in the world. Fortunately for analysts (unfortunately for proponents), there are many examples. 

1. It Didn’t Work in Europe

While 15 European countries have adopted wealth taxes in some form or another, as of this year, nearly all have repealed them. If this is insufficient evidence that wealth taxes are no miracle solution to fix a deficit, the effects tell a more complete story. 

Sweden ended its tax in 2007, after doing incredible damage to its economy. Its tax has been estimated to bring in around $466 million per year, yet over its lifespan has caused $155 billion in assets to leave the country. $23 billion in losses came when just one man, Ingvar Kamprad, the founder of IKEA, turned his wealth over to foreign managers to evade the tax. 

In a study on the French wealth tax, the Impôt de Solidarité sur la Fortune, economist Eric Pichet estimated that the tax reduced annual GDP by 0.2%, and further stated that the tax “impoverishes France.”

But the negative effects are not merely economic, they often drive the wealthier citizens to abandon their country altogether. 

France’s already ineffective tax caused 12,000 millionaires to leave the country per year. This massive exodus prompted the government to not only repeal the wealth tax, but desperately slash taxes across the board.

Not all policies are the same, and Warren’s proposed tax contains measures aimed at preventing a similar migration of wealthy citizens. These tactics, however, have their own consequences.

2. It Attempts to Hold the Rich Hostage

Perhaps in response to the failures of wealth taxes in Europe, Warren’s “ultra-millionaire tax” includes a provision to tax 40% of all assets over $50 million of any American who renounces his or her citizenship. 

Such a nuclear option is an obvious attempt to stem the loss of millionaires seen in other countries, but it forces many Americans to make incredibly difficult choices. 

While 2% may not seem like a big deal in the context of income taxes, the differentiating factor is that this is not an income tax. Rather, the wealth tax demands recurring payments, including on assets that do not yield returns, or are even depreciating.

A house, yacht, car, etc. would all be taxed according to their value. This massively increases the tax burden, and is an enforcement nightmare. The biggest issue for those subject to the tax, however, is that assets that make low or no return would become a massive source of loss.

Assets that yield less than a 2% return would be essentially slapped with a greater than 100% income tax. This could serve to incentivize riskier, more desperate investments and thus greatly distort the economy for everyone, not just the wealthy.

Experience has shown that such significant increases in taxes result more resources being spent on dealing with the costs of the tax, both in enforcement and avoidance. 

3. It Will Encourage Tax-Mitigating Strategies

A hard truth for policymakers to swallow is that higher tax rates don’t always mean more government revenue.

At a certain point, the losses in economic activity and tax-minimizing strategies that become viable outweigh any benefit to the taxes at all. In fact, cutting taxes can actually result in more tax revenue, as a result of increased economic activity.

This phenomenon, known as the Laffer curve, continues to be met with skepticism by leftists, yet its effects can be clearly seen in the revenue losses of the aforementioned European policies. 

Distorting the economy with significant new taxes rarely has the beneficial effects that hopefuls believe it will. 

This leads to a discussion of the reason for the tax in the first place: the revenue.

4. Revenue Will be Much Less Than Claimed

Warren cites an estimated revenue of $2.75 trillion over the next 10 years. This estimate is provided by Saez and Zucman, statisticians who have never performed tax predictions before

More experienced researchers from the U.S. Treasury and National Bureau of Economic Research estimate that Warren’s plan will generate less than half the revenue she claims.

Historically, tax revenue estimates have been greatly optimistic, as they generally do not account for tax mitigating activities that become practical in the face of high tax rates. 

An additional problem is tax enforcement. The IRS already struggles with the relatively straightforward task of taxing income. Adding the complexity of tracking and valuing other assets complicates the task by orders of magnitude. 

5. It Will Not Fix the Deficit

Spending, not a lack of taxation, is the problem in the United States. Proposals like the wealth tax would, at best, be drops in the bucket in terms of repairing the damage of massive government spending. 

That’s why the American Institute for Economic Research claims that the wealth tax won’t fix the deficit.

Given the many negative elements of the tax, the arguments for it are very weak. It clearly will be unable to solve the very problem it purports to address. 

The efficacy aside, there is also a matter of legality.

6. It is Unconstitutional

Warren’s team has secured two opinion letters from legal scholars stating that the wealth tax is constitutional, but their opinion is far from unopposed. 

So what does the supreme law of the land have to say on the matter of taxation? Article I, section 9: “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.”

While courts have not yet interpreted the exact meaning of “direct tax,” it is often understood as a tax on a state of being, as opposed to an activity. This understanding is what prompted the 16th amendment to the constitution to make the income tax legal, an amendment that does not cover the establishment of a wealth tax.

The wealth tax thus faces significant constitutional hurdles and would likely require amending the constitution, something that Warren would almost certainly be unable to do.

7. Summary: It Won’t Work

While most Americans would not be directly affected by a wealth tax, they would almost certainly feel its effects indirectly. The economic distortion and stagnation caused by such a measure would be significant; doubters have only to look at the numerous European examples to verify this.

It is rare that we have such excellent empirical evidence that a plan will fail, and it is hubris on the part of the left to believe that this iteration of the tax will succeed where others have backfired. 

Amongst the many issues with the policy are the following:

In the face of such evidence, one may wonder why? Why persist in advocating a policy that will not succeed, and will cause economic damage? Why propose a law that clashes with the constitution? Why mirror the failures in Europe?

The answer is all too clear: the left loves the idea of forcing the wealthy to fund their social programs. This ‘Robin Hood’ mentality is unhealthy, immoral, and historically unsuccessful. It’s time to address our spending rather than looking for a way to make others to pay for it.

About Timothy Sears

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