Wealth tax redux | Financial Times
FT premium subscribers can click here to receive Free Lunch every day by emailLast week saw the publication of the latest set of the Brookings Papers on Economic Activity. It was, as usual, a feast for those interested in the burning economic policy questions of the day, including articles on Argentina and the changing challenges of inflation targeting.Of most interest to Free Lunch is the article by Emmanuel Saez and Gabriel Zucman, in which they pull together and expand on their recent work analysing progressive wealth taxation. They focus in particular on the specific proposal for a net wealth tax in the US put forward by Elizabeth Warren with their advice. As part of our coverage of net wealth taxes, Free Lunch has reported on this proposal before: it would apply an annual tax of 2 per cent to the net wealth of households owning more than $50m, rising to 3 per cent on fortunes above $1bn. Those owning less than $50m would not be liable to pay the tax.For those following the wealth tax debate — and there are many who are not but who should, because wealth taxes are coming sooner than you might think — Saez and Zucman’s Brookings paper makes three useful contributions.First, the authors set out strikingly how a Warren-style wealth tax would have shaped the evolution of US wealth inequality since the early 1980s. The 400 richest Americans held less than 1 per cent of the national economy’s wealth in the early 1980s. Today, that share is almost 3.5 per cent, a quadrupling in a generation. Saez and Zucman model a progressive wealth tax that kicks in with a 2 per cent annual tax rate at $50m net wealth (those with less pay nothing) and a higher rate on fortunes of $1bn and above. With a billionaire’s wealth tax rate of 3 per cent, the top 400’s wealth share would have stabilised around 2 per cent in this decade — still more than twice the early 1980s. To undo the increase since then, billionaires would have had to pay 10 per cent (!) of their net wealth in tax every year.
Second, Saez and Zucman refute — to my mind conclusively — an attempt by an intellectual heavyweight of the centrist Democratic party establishment to shoot down their wealth tax proposal. Lawrence Summers, the former World Bank chief economist and US Treasury secretary, together with Natasha Sarin, argued this spring that the wealth tax base was much smaller — perhaps one-tenth or less — than what Saez and Zucman estimated in their research for Warren. Essentially accusing them of getting the maths badly wrong, Sarin and Summers invited us to treat the wealth tax as a silly distraction that would bring in a lot less than promised. But this attempt at discrediting the proposal is unconvincing, because it seems Summers and Sarin’s argument runs into arithmetical problems of its own. That argument is based on how much the US estate tax (a tax on wealth at death) brings in today, which is only $25bn. But Saez and Zucman point out that there are massive exemptions in the estate tax, and because the very rich have a lower mortality rate than the average person, Summers and Sarin’s extrapolation underestimates the underlying wealth. Adjusting for these factors corroborates Saez and Zucman’s tax base estimates of more than $10tn of wealth that would be caught by the Warren tax, for several hundred billion dollars in annual revenue. This does, of course, depend on the premise that the tax net can be woven so as to avoid big loopholes or evasion opportunities. The authors quite rightly emphasise that systematic reporting — as with personal income taxes — and robust enforcement, including a hefty fee for giving up citizenship, are essential. But they also go through each challenge to both measuring wealth and preventing avoidance, showing that if the political will is present, the technical obstacles are quite manageable.The chief question hanging over the viability of a wealth tax, then, is political. Saez and Zucman speculate that this is what did it for the wealth tax in many European countries that have abolished them: the left widened them to the point where special interests successfully lobbied for exemptions; the right could then argue that the loopholes made it a bad tax. All the more reason to learn from Saez and Zucman in how to bulletproof the design of any new wealth tax a future leader might want to introduce, in the US or elsewhere. Other readablesI give voice to a devil’s advocate for monetary hawks ahead of today’s European Central Bank meeting.Nearly 40 per cent of the world’s measured foreign direct investment consists of “phantom” investment in shell companies rather than productive capital, according to an IMF study.In a video, my colleague Katie Martin and I discuss whether we are heading for a recession.