Consider the wealth tax

Consider the wealth tax

By Matthew Yglesias

SlowBoring.com

March 9, 2021. 

During the course of the 2020 primary campaign, she embraced two different versions of wealth tax proposals, and Sanders campaigned on a third, different proposal. The fact that the wealth tax keeps bouncing around with different numbers attached is a bit odd. So is the fact that what it’s financing is always changing. For Warren, it was originally the workhorse of her campaign plans for expanded child care and other things. But then when she felt pressure to develop a Medicare for All financing plan, a bigger wealth tax became part of that. Sanders’ wealth tax seemed designed to be higher than Warren’s just so he could be the true left candidate.

Now, the latest wealth tax iteration is vaguer in its purpose.

Warren, in the roll-out release, says “this is money that should be invested in child care and early education, K-12, infrastructure, all of which are priorities of President Biden and Democrats in Congress.”

But Biden ran his own primary campaign and had ample opportunity to go in this direction if he wanted to. So at times, the wealth tax seems like an answer in search of a question. The idea is to demonstrate that there’s a high-polling, politically popular way to finance a Nordic-scale welfare state without a Nordic-style tax system that would ask more of middle-class Americans. I think that’s probably not true. But even if it is, it’s weird — the wealth tax is somehow simultaneously a pragmatic political gambit, and also something that has no politically plausible path to being enacted.

What made Warren’s campaign so fun to cover, though, was that her famous “plans” did a great job of raising the big, conceptual issues with the American economy. So I do think it’s worth going over the wealth tax, its origin, and its rationale.

The alchemy of wealth

In the national accounts, all of your money is either saved or consumed.

Consumption is like when you buy lunch and then you literally consume the lunch. But buying underwear is also consumption. So is taking a flight on a plane or filling up your car with gas.

Saving could mean that money goes into your savings account. But if you take some money and invest it in the stock market, that is also saving. Indeed, in this sphere of economics, savings and investments are equal by definition, which is not how normal people use those words.

What makes this a little fuzzy is that some forms of consumption are neither as ephemeral as lunch nor as impossible to re-sell as underwear. These are your “durable goods,” like furniture and appliances, that last for years. From a household balance sheet standpoint, the difference is that even a really nice, solid table is going to sell for less than you paid for it if you try to unload it after three years of use. By contrast, a share of stock in a company that manufacturers tables could go either up or down. The table depreciates. The table company stock is an investment. That said, the share of stock represents a claim on the assets of the table manufacturing company. Those assets include a bunch of machinery that is table-like — long-lasting but depreciating, and probably hard to resell.

Where this gets really imponderable is that if you buy a computer, that’s household. But if your employer buys you a computer, that’s a business investment. And, weirdly, if I buy myself a computer, that’s also a business investment — because I own a business where I employ myself to type on a computer.

In other words, these are not — to an extent — metaphysical or economic distinctions. They are distinctions of tax law. Households pay taxes on their income, but then can often get tax breaks for saving that income in a 401(k) or 529 or HSA or IRA. Businesses pay taxes on their profits, but they can deduct their investments. Broadly speaking, this is all because we think investment is good and a prosperous society should have a big stockpile of stored-up investments. But of course you’re not going to invest for no reason — your investments will generate income. But in order to encourage investment, we tax that income (capital gains and interest) at preferential rates compared to labor income.

And all this accumulated, income-generating investment is wealth.

How we tax wealth

There is no “wealth tax” in the United States. But if you imagine two co-workers who do the same job and live in the same town and get paid the same salary, but one is Wealthy and the other is Not Wealthy, there are a variety of ways that the Wealthy one will end up paying higher taxes.

The most salient one is that most Americans — and especially most affluent Americans — own a home, and rich people sometimes own two or even three homes. These homes are subject to property taxes. Property taxes are not “wealth taxes,” because a person who owns a $340,000 home outright is a lot wealthier than a person with a $340,000 home and $270,000 in mortgage debt.

Still, residential real estate is a major form of wealth in the United States — for middle-class people, it’s generally their main form of wealth.

Then there are bonds, stock, and other financial instruments. Most Americans own at least a little of this stuff, but the ratio of financial instruments to real estate goes up the richer you get. There’s a school of thought which says there should be no taxation on the income that these kinds of investments earn. Then there’s a rival school of thought which says income is income, and it should all be taxed the same. The United States kind of splits the baby here — capital gains and dividend income is taxed, but it’s taxed at a lower rate than labor income. And the moderately wealthy also have a lot of ability to shelter their investment income from taxation through various kinds of special accounts — though the truly rich are way too rich for this to work.

Last but by no means least, if you are very rich, then the value of your estate will be taxed before you can pass it on to your heirs. This is paired with an obscure tax loophole called “stepped-up basis.” When you sell a share of stock, you pay tax on the profits — the difference between the purchase price and sale price. But if you inherit stock, you get to use the share value at the time of inheritance rather than the original purchase price. This is a big deal. And since the estate tax only starts to kick in at $11 million, it’s really not a trivial thing. If you inherit $10 million in stock from your dad, you’re not going to make any Forbes lists, but you’re still way richer than the typical American. And your dad won’t have paid taxes on his stock gains because he never sold, and then the estate is too small to be taxed, and if you sell the stock right away then the stepped-up basis means you don’t pay tax either.

Proposals to tax wealth

The first time I heard a proposal for a wealth tax came when I interviewed the famous French economist Thomas Piketty on the book tour for the English translation of “Capital in the 21st Century.”

His idea was that instead of relying on property taxes, which he characterized as basically a regressive and arbitrary form of wealth tax, we should have a modest progressive tax on net wealth.

I thought at the time (and continue to think) that this was an intriguing suggestion if you abstract away from all the many institutional and legal issues. The big problem is that at least in the United States, property tax is the workhorse of local governments, and only the federal government could feasibly collect a wealth tax. There’s also a lingering question as to whether wealth taxes are even constitutional at all. But the key thing about the Piketty Tax Reform is that I can tell you exactly what the point is, which is namely to make it easier than it currently is for the majority of people to build personal wealth. In that sense, it fits very nicely with certain Jeffersonian themes in American political history.

It’s also a plausible answer to the question “Why don’t you just act like the Nordics?” because the goal is to create something different than the Nordic outcome (whether or not that’s a good goal is another question).

But what we’ve been talking about more recently is different:

Warren, January 2019: 2% tax on household net worth between $50 million and $1 billion, and 3% on household net worth above $1 billion.

Sanders, September 2019: 1% marginal rate on household net worth between $32 million to $50 million, with an escalating series of brackets that ultimately ends at an 8% tax on net worth above $10 billion.

Warren, November 2019: Raises the rate on net worth over $1 billion to 6%.

Sanders and Warren, March 2020: Back to the original Warren proposal, but this time with Sanders as a cosponsor.

In all four versions, the idea is, broadly speaking, to finance government spending on various normal progressive things. But they are also all paired with Piketty-style arguments that we should care a lot about wealth inequality.

Should we care a lot about wealth inequality?

Warren’s work on this was done in collaboration with Gabriel Zucman and Emmanuel Saez, two French economists who’ve also worked with Piketty. The three of them, it seems to me, have two big points about the hyper-wealthy and why they are bad.

One of them, which I found very plausible a decade ago and much less so today, is that the super-rich can use their wealth to effectively control the political system and further entrench their wealth.

Now there’s clearly something to this. Michael Bloomberg and I are both secular Jewish liberals who have broadly similar center-left political ideas and a lot of interest in American politics. But while I have a somewhat influential blog and Twitter feed, he has a whole media empire and a vast fortune. Consequently, he is more politically influential than I am. And you can see the evidenced consequences of this on topics like gun control, where he and I have different ideas. Probably the single biggest lever through which I could get my way into this subject would be to personally persuade Michael Bloomberg and create a situation where a Democrat is more likely rather than less likely to get Bloomberg Bucks if he tacks to the center on guns.

That said, I think the specific concern about political domination by a billionaire oligarchy is now in rough shape.

Donald Trump was a mostly-fake populist, but at the same time he was clearly not the preferred choice of the GOP donor class, who could neither stop him nor make him go away.

Joe Biden eventually became the choice of “the Democratic establishment,” but his primary fundraising was terrible. The mainstream donors wanted Buttigieg or Harris or Beto, and both Sanders and Warren raised more money than those three anyway.

Billionaires are clearly not the reason that it is politically challenging to impose a carbon tax, create a path to citizenship for the undocumented, or hold police officers accountable for misconduct, just to name a few issues that have inspired a lot of recent passion.

A lot of the political influence of rich businessmen comes from the fact that they control important businesses — even if you cut Mark Zuckerberg’s wealth by 90%, as long as he controls Facebook and Facebook is a major source of information, he’s still very influential. By the same token, Rupert Murdoch is a much more politically significant figure than the much-richer Elon Musk.

Small donors keep becoming more and more important in politics, so while Bloomberg-style influence clearly matters, its impact seems to be getting weaker rather than stronger.

The other concern is a worry that the world will become dominated by dynastic wealth as it was in pre-World War I Europe.

I don’t think this is a crazy thing to worry about, and I do think that boosters of American entrepreneurialism should be a little more cognizant of the fact that if Sam Walton had one heir rather than four, that person would be the richest person in America. That said, in the actually existing United States of America, nine out of the top 10 richest people are founders/entrepreneurs rather than heirs. Number 10 is Charles Koch, which I think is a somewhat ambigious case. Then you have Julia Koch, three Waltons, and MacKenzie Scott, so you start getting into dynastic territory.

I think a lot of folks in Silicon Valley are too complacent about this. We’re closer to dynastic wealth being a huge issue than they sometimes want to admit. But I would not say that this is a first-order problem right now in the year 2021. Many top billionaires, thankfully, have taken The Giving Pledge, and the rest should be encouraged to do so. More quietly, we should encourage the mega-rich to follow the examples set by Elon Musk and Jeff Bezos to have large numbers of children and/or divorces. The extent to which the top ranks of wealth are dominated by heirs vs. founders is heavily influenced by how many kids the richest people have, and I think Piketty’s analysis sort of discounted that.

So in terms of “we need a wealth tax to fight dynastic wealth,” I would kind of put a pin in it and see where we are in 20 to 30 years. The real issue that Warren and Sanders are putting on the table is tax revenue.

The $3 trillion question

Saez and Zucman estimate that the Ultra-Millionaire Tax would raise about $3 trillion over a 10-year window.

Critically, it also polls well. And this seems like basically the best argument to me — if you faced an urgent need to raise $3 trillion in a way that polls well, then Warren and Sanders have come up with one.

That said, the constitutional issue here worries me a lot. Warren has put out two letters (here and here) from constitutional law experts arguing that there’s no problem with a wealth tax. Unfortunately, none of those experts is Leonard Leo or a former John Roberts clerk. Warren has convinced me that if I were on the Supreme Court, I would rule that the wealth tax is fine. But it seems to me that the legal merits of this issue have very little practical importance. It’s clear that conservative jurists are somewhat reluctant to back-track on well-established legal precedents. But tossing out a totally novel legal theory is cruising for a bruising.

When you think about it, it’s actually especially perverse to kick a question about oligarchical control directly over to the branch of government most insulated from public opinion.

What’s more, while this particular form of taxing the rich is definitely popular, it’s not obvious that it has big advantages over other forms of taxing the rich. There’s weirdly little polling of Joe Biden’s actual tax proposal, but the most recent thing I found showed that about two-thirds of the public supported higher income taxes on those earning over $400,000 a year.

I also have some serious doubts about the wealth taxers’ framing concepts. Frank Newport of Gallup did a great piece in 2019 on “Americans’ Longstanding Interest in Taxing the Rich,” where he notes that even though higher taxes on the rich is popular, there is very little popular animosity toward rich people, and reducing inequality is ranked by the public as a very low priority. Those aren’t exactly reasons not to do a wealth tax. But they are reasons to ask again, why exactly we are doing this? The wealth tax is popular, but so is Democrats’ normal “tax the rich” proposal — and that proposal raises fewer constitutional issues. The fact that the politician most identified with the wealth tax is extremely unpopular — in 2018 she underperformed Bob Menendez, who was in the middle of a corruption scandal — is further reason for pause.

The very best reason I have ever heard for doing a wealth tax is that the one-shot nature of the estate tax makes it too easy to avoid — you only need to dodge it once — while the steady drip, drip, drip of the wealth tax gives the IRS more bites at the apple. That’s fair enough, I suppose, but you still achieve a very similar effect by ending the stepped-up basis loophole and (if you want to) raising capital gains and dividend tax rates.

Upward toward social democracy

I’m not “against” the wealth tax per se, and if someone running for office thinks it’s politically compelling then go for it, I suppose.

But in terms of the slow boring of hard boards, I don’t love it.

If you’re writing a reconciliation bill that needs tax increases to offset new spending, then it’s going to be harder to get 50 Democratic senators for a wealth tax than for a more banal tax hike.

If you’re trying to do a bipartisan deal with Republicans, then God help you if you’re trying to sell them on the wealth tax.

If you’re sincerely worried about the revenue situation, then introducing a tax that the Supreme Court might toss out seems ill-advised.

And if you’re actually not worried about revenue, then a tax seems like a bad answer.

Concentrated economic power needs to be fought with antitrust remedies and probably a new body of communications law to deal with the tech giants.

Codetermination — another Warren idea that she wound up talking about less — is a proven means of directly empowering workers vis-a-vis employers that I think has some unique advantages, and is also something we have actual experience with in Germany. Even more broadly, it’s common in Europe to have what’s known as “sectoral bargaining,” where there is a pattern union agreement across an entire industry. That’s another powerful egalitarian tool that has stood the test of time.

Last but by no means least, we really do know how expansive welfare states work. They offer universal benefits that are financed by moderately progressive tax systems. If you look at Denmark or Sweden, they tax the rich more than we do. And they tax the middle class more, too. It’s just overall higher taxes, and in exchange, you get more stuff. It is a more egalitarian distribution of resources, but it doesn’t stop successful Swedish corporate founders from becoming billionaires. What’s more, if you are making the case for a more expansive welfare state, I think you actually want to reassure people that America will continue to be the home to successful startups. And successful startups, by their nature, generate large amounts of unrealized capital gains.

The big issue is that you need to actually persuade people that they want less private consumption and more public consumption. Higher taxes, but a stronger guarantee of free healthcare, cheap child care, and cheap higher education.

It’s not wrong to say that the rich need to pay their fair share or that we could use some redistribution. But even a “regressive” tax like a VAT, congestion pricing, or a carbon tax is highly redistributive if it’s used to finance a universal program. Taxing the middle class is unpopular, fine, so prudent politicians shouldn’t lead with their chin. But there’s nothing wrong with normal approaches to taxing the rich, no particularly urgent need to offset anything with tax increases right now, and in the long run, no real path forward for progressive politics that doesn’t involve convincing people that they are going to get cost-effective public services. The wealth tax concept, to me, mostly seems like an effort to evade that conversation.