The return of the wealth tax

Warren is going after the billionaires

The changing political climate, particularly in the US, has put the idea of confiscating riches from the very wealthy back on the agenda. But does this make economic sense? Simon Wilson reports.

What are wealth taxes?

They're levies on people's assets their personal net wealth rather than on incomes. Sweden, for example, charged an annual levy on taxpayers' net assets for the best part of a century, with a top marginal rate that peaked at 4% in 1984; it was abolished in 2007. France had a wealth tax (riddled with loopholes) that was abolished by President Emmanuel Macron in 2017. Indeed, in general wealth taxes are far less popular than they were. In 1990, 12 rich countries still had them. Today, only four do, namely Norway, Spain, Switzerland and Belgium. In Switzerland, the level varies by canton between about 0.3% and 1% of a taxpayer's net worth above a threshold typically in the low six figures. Spain had scrapped its version, but re-introduced it after the financial crisis. Belgium recently brought in a tax on financial assets above €500,000.

Why are wealth taxes in the news?

Chiefly because the current favourite to win the Democrats' nomination for US president, Elizabeth Warren, has vowed to introduce a wealth tax if she beats President Donald Trump next autumn. She wants a 2% annual levy of net wealth above $50m, rising to at least 3% (and perhaps as much as 6%) on holdings over $1bn. Emmanuel Saez and Gabriel Zucman, the academic economists who have advised Warren on the policy, calculate that this would raise $270bn a year, around 5% of the US federal budget. Only 75,000 families would come in above the threshold (around 0.1% of households) and only 900 would pay the billionaires' surcharge. In addition Warren plans a 40% "exit levy" on people renouncing US citizenship to escape the tax. She also plans to raise individual and corporate income tax, increase capital gains tax and revamp estate (inheritance) taxes.

Are such taxes fair?

Fairness is in the eye of the beholder. No doubt, should she be the candidate, Warren will be framed by Republicans as a wicked Venezuelan-style socialist and destroyer of free enterprise. Moreover, given Warren's status as a long-term vocal foe of Facebook and other technology giants which she regards as monopolistic threats to democracy the traditionally Democrat-leaning capitalists of Silicon Valley are unlikely to step in to boost her campaign coffers. There is also a question mark over the legal status of a US wealth tax: the question of whether it is constitutional would be certain to be tested in court. Yet there are plenty of affluent Americans (not to mention poor ones) who would support a wealth tax on grounds of fairness.

Why's that?

First, because of the widening inequality in levels of wealth in the US. Economist Branko Milanovic, in his recent book Capitalism, Alone, calculated that the top 0.1% of Americans own the same share of US wealth (22%) as the bottom 90% of the population. And the top 1% owns 40% of the wealth. "That's both ethically wrong and economically inefficient," argues Edward Luce in the Financial Times. And, second, it's because the very wealthy pay less overall than the merely well-off and the just-getting-by. According to Saez and Zucman, in their book The Triumph of Injustice, in 2018 the top 400 wealthiest US families paid a lower real tax rate than any other income group, at just 23%. That's because the richest make far more money from their money than they make from wages, and pay less in capital gains tax than they would on income. To many people, that is obviously unfair.

Are wealth taxes the answer?

With all taxes, there's a trade-off between revenues raised and entrepreneurial incentives blunted at a cost to future overall growth. Most wealthy Americans never realise their capital gains, and unrealised gains are written off when individuals die. So there is clearly a case for taxing capital directly. However, critics such as Larry Summers (Treasury Secretary under Bill Clinton) and Greg Mankiw (chief economic adviser to George W. Bush) argue that a wealth tax would yield little revenue and distort investor behaviour. The biggest problem with wealth taxes is that they are difficult to administer and enforce. Reliable estimates of net worth are not easy to establish, and costly disputes are inevitable. Wealth can be hidden overseas, or in complex legal structures.

What else is problematic?

Since debt is deductible, wealth taxes tend to encourage the rich to avoid the tax by borrowing to invest in exempted asset classes (farmland or woodland, say), thus both shrinking the tax base and distorting the economy. Alternatively, they might simply leave the country for a lower-tax jurisdiction, as did thousands of wealthy French citizens who set up in Belgium. In other words, say critics, a wealth tax would only work if it were adopted globally that is, never. Another argument against wealth taxes is that rather than diminish billionaires' political power, they would increase it by encouraging them to spend their money on nefarious political causes.

Could it happen here?

Denis Healey, Labour chancellor in the 1970s, wrote in his memoirs: "We had committed ourselves to a Wealth Tax; but in five years I found it impossible to draft one which would yield enough revenue to be worth the administrative cost and political hassle". Today's would-be Labour chancellor, John McDonnell, has argued for wealth taxes in the past, though (pending publication of the party's new manifesto) a wealth tax is not current party policy. But if, as it seems, the politics is turning in favour of higher taxation of capital, then the alternative to a wealth tax is not no change, but higher rates on profits, dividends and capital gains, which would hurt entrepreneurs who deploy their assets productively, says Martin Sandbu in the FT. If that argument can be made to fly, wealth taxes may look more politically attractive even if the practical problems inherent in their implementation remain unresolved.