Proposals to introduce a wealth tax into the US Internal Revenue Code have been emphasized by some Democratic candidates such as Bernie Sanders, Tom Steyer, and Elizabeth Warren especially as the first primaries for the 2020 presidential election are approaching.
Upon hearing about this wealth tax you might be wondering to whom it would apply. Would it be to executives with substantial grants of stock options or restricted stock units, to any company founder that built a successful company, or employees who joined an early-stage startup and now have a significant wealth after an acquisition or IPO?
Would this apply to people with equity compensation and company stocks? Well, this wealth tax literally applies to super-mega wealthy billionaires and millionaires. For example, under Senator Warren’s proposal, unless your household’s net worth is over $50 million, then the wealth tax will not apply to you.
Individuals such as Michael Bloomberg, Jeff Bezos, Larry Ellison, Bill Gates, Larry Page, Mark Zuckerberg, and others whose enormous wealth comes from stock in the companies they founded are where the wealth tax would apply.
The Penn Wharton Budget Model (PWBM) recently held a live-internet streamed seminar The Wealthy Tax Debate. Wharton School is the business school at the University of Pennsylvania and PWBM is a nonpartisan research-based initiative at the Wharton School. The feasibility and tradeoffs of the wealth tax proposed by Senator Warren and other Democratic Presidential candidates have been discussed by three scholars. Below are some highlights from each of the speaker’s points.
This streaming video is for anyone interested in tax and public policy issues since this is not as exciting as Netflix or Amazon Prime. One sitting is not enough too since it runs about 90 minutes (presentations 50 mins and Q&A for the remainder). With the speaker’s slide decks on-screen during their talks, shot with a single camera and no editing.
You will come away with a better understanding of the complex issues involved with the wealth tax after watching the full 90-minute running time of the video stream seminar. Supporters of the wealth tax may find parts of it tough viewing and those who oppose the wealth tax will give this a thumbs up.
Traditional income taxes struggle to reach many of the wealthiest US citizens since they have vast assets but with little income. For the richest Americans to pay their fair share along with the rest of the taxpayers, in the view of some of the Democratic presidential candidates, a wealth tax would ensure those.
By limiting the amount of wealth and related influence that the rich can accumulate, is what the wealth-tax proposals seeks: to protect democracy itself. Therefore, controlling the potential for one tiny plutocracy to dominate election campaigns.
The three speaker’s primary focus is Senator Warren’s proposed wealth tax. Two economists at the University of California, Berkeley: Emmanuel Saez and Gabriel Zucman developed her proposal’s rationale, research, and estimates of revenue potential.
The initial projection of the impact Senator Warren’s proposed wealth tax would have on revenue and the US economy of Richard Prinsinzano’s team, the Director of Policy Analysis at PWBM, was presented. Annual economic growth in the United States would slow from the current average of 1.5% to an average of just over 1.3% over a decade if the tax raises as much new revenue as intended and the revenue will be used to cut the federal debt, the researchers found.
Wealthy Americans would simply save less, consume more, and invest less to reduce taxable wealth, the PWBM finds. There is a possibility that economic growth will reduce when there is a resulting drop in investment. Mr. Prinsinzano summarized that the wealth tx shrinks the economy because saving is more expensive.
The revenue estimates of Senator Warren’s wealth tax that was calculated by Saz and Zucman at UC Berkeley was dissected by an assistant professor of law at the University of Pennsylvania Carey Law School, Natasha Sarin. In short, their assessments are flawed and unrealistic, she said. She projected that the proposed wealth tax would generate $1.1 trillion far lower than the Warren team’s estimate of $2.75 trillion after she dynamically corrects what she considers ‘sloppy math’ and unfounded assumptions about actual wealth holdings and compliance among the rich.
Difficult practical issues are raised because of the task of annually assessing the net worth for the wealthy of the wealth. How would they value given that over 50% of wealthy assets are illiquid?
Professor Sarin showed in her slide deck some efficient ways to raise federal revenue instead of attempting a wealth tax that may be problematic:
Through this, the revenue estimate of $2.75 trillion put forward by Senator Warren’s team will be slightly beaten by these measures that would increase revenue by $2.83 trillion.
Debi G Hill, CPA