Progressive Tax Proposals Are Quite Modest

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Photo credit: Wall Street Journal.

Saez and Zucman estimate conservatively that Warren’s wealth tax proposal would raise $2.75 trillion over the next decade. If you redo the same calculation without bending over backward the expected haul is $3.1 trillion. The arithmetic is straightforward. There are 78,000 households with net worth greater than $50m (the top 0.06 percent of 130m US households) and 900 households with net worth greater than $1 billion. Total taxable wealth above these thresholds is $10.5 and $3.1 trillion (Cf. total wealth of American households $94 trillion). 2 percent of the former is $210 billion and 1 percent of the latter is $31 billion, for an annual haul of $241 billion, which under the CBO’s baseline projections is multiplied by a factor of 13 to get the tax revenue over the next decade (nifty rule of thumb), 13*$241=$3,133 billion.

So the Piketty-Warren wealth tax will, if enforced with Nordic efficiency, raise $3 trillion dollars from the superrich. How onerous will this burden be on them? Will it be punitive or bearable?

The total annual tax burden on the 0.1 percent richest American households is 3.2 percent of their wealth, Saez and Zucman note, compared to 7.2 percent for the bottom 99 percent. With the wealth tax, the tax burden of the superrich would rise to 4.3 percent of their wealth. By this measure, they would still be better off than most Americans.

Moreover, the superrich also get higher returns than the merely rich, as they are likely to even after the wealth tax:

The estimates by Saez and Zucman show that, from 1980 to 2016, real wealth of the top 0.1% has grown at 5.3% per year on average, which is 2.8 points above the average real wealth growth of 2.5% per year. Average real wealth of the Forbes 400 has grown even faster at 7% per year, 4.5 points above the average. The historical gap in growth rates of top wealth vs. average wealth is larger than the proposed wealth tax. Therefore, even with the wealth tax, it is most likely that top wealth would continue to grow at least as fast as the average.

 

So the burden of the Piketty-Warren wealth tax on the superrich is modest. It would still leave them in a better position that those less well placed than themselves. Adding AOC’s 70 percent tax on incomes above $10m, would raise some $72 billion in 2019 and an estimated $936 billion over the next decade. With both these taxes, the total burden on the superrich in the aggregate would be 4.6 percent of their wealth.

As as third leg of the triad, we could add Obama’s 2016 proposal for increasing the capital-gains tax to the same level as that of earned income. That would raise $240 billion over the next ten years. With the full triad the burden on the superrich would still be a relatively modest 4.9 percent of their wealth.

The modesty of the proposals is not all bad. It enhances the legitimacy of the taxes and makes their enforcement easier. Saez and Zucman assume that the superrich will be able to successfully hide 15 percent of their wealth from the taxman. This average is driven by the Swiss outlier. As they explain in footnote 2, the tax avoidance rates in Sweden and Denmark were dramatically lower: just 0.5 percent. Moreover, the arm of American law is the longest of them all. Compliance should not be a problem as long as the political will exists. As Nicholas Mulder has suggested, the abuse of offshore secrecy jurisdictions can be tackled by redirecting the vast apparatus of sanctions enforcement to crack down on tax avoidance.

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