In her campaign speeches, Sen. Elizabeth Warren likes to say, “I’ve got a plan for that.” She has lots of plans, but there is one on which many of the others hinge: her plan for an “Ultra-Millionaire Tax,” an annual wealth tax on all assets over $50 million.
Warren, one of two dozen Democrats running for president, is counting on the revenue she projects it will raise to fund a host of her other priorities on child care, education and more.
But how would it work exactly? Have other countries tried it, and how did it work there? Will it really raise as much as Warren claims? (Spoiler: Some economists doubt it.) And what do Americans think about the idea?
We’ll try to answer some of those questions below.
What is Warren’s ‘Ultra Millionaire Tax’ plan?
Many of the Democrats running for president have talked about raising taxes on wealthy Americans. Most have talked about repealing some of the income tax relief granted to high-income earners through the Republican-crafted Tax Cuts and Jobs Act, which affects largely income.
Under Warren’s wealth tax plan, households would pay an annual 2% tax on all assets — net worth — above $50 million, and a 3% tax on every dollar of net worth above $1 billion.
What’s included in the calculation? Almost everything. As Warren’s campaign website explains, “All household assets held anywhere in the world will be included in the net worth measurement, including residences, closely held businesses, assets held in trust, retirement assets, assets held by minor children, and personal property with a value of $50,000 or more.”
Or, as Warren put it in a tweet, “If you own a home, you’re already paying a wealth tax — it’s called a property tax. I just want the ultra-rich to pay a wealth tax on the diamonds, the yachts, and the Rembrandts too.”
University of California, Berkeley, economists Gabriel Zucman and Emmanuel Saez, who study wealth inequality, say Warren’s tax would fall on about 75,000 U.S. households (less than 0.1%) and would raise around $2.75 trillion over 10 years.
Other Democratic candidates, including Beto O’Rourke and Pete Buttigieg, have expressed support for the concept of a wealth tax. Sen. Bernie Sanders has proposed increasing estate taxes for the wealthy, and has floated the idea of an annual 1% tax on “extreme wealth,” which he defines as assets exceeding $21 million. But Warren’s plan is the most detailed and ambitious so far.
How would the tax revenues be spent?
Warren is banking on a $2.75 trillion revenue projection from Zucman and Saez to fund a host of her priorities. In speeches, she has laid out those beneficiaries:
- Universal child care for every child age 0 to 5.
- Universal pre-K for every 3- and 4-year old.
- Raise wages for all child care workers and preschool teachers “to the professional levels that they deserve.”
- Free tuition and fees for all public technical schools, 2-year colleges and 4-year colleges.
- $50 billion for historically black colleges and universities.
- Forgive student loan debt for 95% of those with such debt.
- $100 billion over 10 years to combat the opioid crisis.
- “Down payments” on a Green New Deal and Medicare for All.
The Warren campaign estimates the first three programs — dealing with child care and universal pre-K — would cost about $700 billion over 10 years. And the next three — free public college tuition, money for historically black colleges and canceling most student loan debt — would cost about $1.25 trillion over 10 years. That would leave more than about $750 billion for the Green New Deal and Medicare for All, the campaign says. That’s not enough to fully fund either one, but Warren says it is enough for a “down payment” on each.
How reliable is Warren’s $2.75 trillion revenue forecast?
Whether Warren’s plan would actually raise $2.75 trillion is a matter of debate among economists.
The $2.75 trillion forecast comes from Zucman and Saez. To estimate how much revenue the tax would generate on wealth over $50 million, the economists used data from the Survey of Consumer Finances from the Federal Reserve Board and the Distributional National Accounts recently created by economist Thomas Piketty, Saez and Zucman. To estimate the revenue from the tax on billionaires, the economists used the Forbes 400 list of the richest 400 Americans in 2018.
Zucman and Saez estimated that people would reduce their reported wealth by 15% “through a combination of tax evasion and tax avoidance.” The authors wrote that “recent research shows that the extent of wealth tax evasion/avoidance depends crucially on loopholes and enforcement. The proposed wealth tax has a comprehensive base with no loopholes and is well enforced through a combination of systematic third party reporting and audits. Therefore, the avoidance/evasion response is likely to be small.”
But some economists think that assumption is too rosy.
While neither the Tax Policy Center nor the Tax Foundation has yet released a full analysis of Warren’s plan, economists at both said there is reason to believe Warren’s revenue estimate is too high.
Kyle Pomerleau, chief economist and vice president of economic analysis at the nonprofit, pro-business Tax Foundation, said that the assumption of 15% tax evasion/avoidance is “actually the average avoidance for the entire U.S. tax system, which is primarily the income tax and payroll tax. These taxes are, in principle, much harder to avoid than a wealth tax because the transaction (income) is hard to game or hide from the tax authorities. There is a good record of how much you are being paid by your employer.”
“A wealth tax, on the other hand, is much harder to enforce,” Pomerleau said. “For one, much of the wealth tax base doesn’t have a market price. For example, we don’t really know how much a particular privately-held business is worth because equity (stocks) in that company are not regularly traded on the open market.”
Pomerleau also warned that because the wealth tax is a significant tax on savings, it will discourage people from holding on to assets. “This effect will reduce the potential tax base,” Pomerleau said, a trend that was not accounted for in Warren’s estimate.
Howard Gleckman, a senior fellow at the nonpartisan Tax Policy Center, has similar concerns.
“First, while her plan anticipates some tax avoidance, it will be very difficult for the IRS to keep up with the tax planning that highly-paid lawyers and accountants can devise,” Gleckman told us via email. “With so much money at risk, the wealthy will have powerful incentives to hire smart advisers to help avoid, or at least reduce, their tax liability.
“Second, a large share of wealth held by the high net worth taxpayers is in the form of privately held businesses,” he said. “And these are notoriously difficult to value. In effect, the IRS would have to prove that a taxpayer’s valuation is unreasonably low.”
“I suspect she would collect less revenue than she predicts, but I cannot say how much less,” Gleckman told us.
In an op-ed published in the Washington Post on April 4, Lawrence Summers, a Harvard University professor who was treasury secretary from 1999 to 2001 and an economic adviser to President Barack Obama in 2009 and 2010, and Natasha Sarin, an assistant professor of law at the University of Pennsylvania Law School and an assistant professor of finance at the Wharton School, took direct aim at the $2.75 trillion estimate.
“Common-sense revenue estimates by economists who are not very deeply steeped in revenue estimation tend to be overly optimistic,” Summers and Sarin wrote.
The two looked at the U.S. experience with estate tax data and concluded Warren’s wealth tax would only raise about 40% of the amount estimated by Saez and Zucman. And that’s being “maximally optimistic about the wealth tax’s revenue potential,” Summers and Sarin wrote.
“We suspect that to a great extent it reflects the myriad ways wealthy people avoid paying estate taxes that in some form will be applicable in any actually legislated wealth tax,” Summers and Sarin wrote. “These include questionable appraisals; valuation discounts for illiquidity and lack of control; establishment of trusts that enable division of assets among family members with substantial founder control; planning devices that give some income to charity while keeping the remainder for the donor and her beneficiaries; tax-advantaged lending schemes; and other complex devices known only to sophisticated investors. Except for reducing a naive calculation by 15 percent, Saez and Zucman do not seem to take account of these devices.”
“If our suspicion is correct, such a wealth tax will not yield the revenue that its proponents hope for, and that when actual scorekeepers score actual proposals, their estimates will disappoint advocates,” they concluded.
“In our view, the $2.75T is not realistic,” Sarin wrote to us in an email. “The closest we get based on extrapolation from the estate tax (which seems relevant because it involves a very similar population and thus many of the same evasion incentives and possibilities) is around 40% of this estimate.”
In an email response to FactCheck.org, Saez challenged the Summers and Sarin use of the estate tax to estimate the effects of Warren’s wealth tax proposal.
“It is well known that the estate tax is very poorly enforced and that the rich manage to largely avoid/evade it by giving to heirs before death, spouses, and charity, using lots of trick to discount assets,” Saez wrote.
“We have assumed an evasion rate of 15% based on the best literature on the question (as we discuss in our letter and in more detail here),” Saez added.
Saez said the Summers-Sarin estimate that the tax on those with assets worth more than $50 million would bring in just $25 billion a year implicitly assumes “that over 90% of the wealth will be hidden.” That’s not reasonable, Saez said, because “80% of the assets of the rich are publicly traded stocks, bonds, real estate for which there are clear market values.”
“Take a simple example to debunk Summers-Sarin: the Forbes 400 richest have $7.2 billion on average in 2018, the Warren tax on them would collect $82 billion (assuming zero tax evasion), that’s already 3 times more than Summers and Sarin $25bn number. How are Bezos, Zuckerberg, etc. going to pretend the Amazon and Facebook stock they own is worth only 10% of their market value? Impossible if the wealth tax is seriously enforced as Warren plans to do,” Saez said.
In a point-by-point written response to the Summers-Sarin post, Saez and Zucman argue that their estimate is not a “‘best case’ scenario” but rather a middle ground. “With pre-populated returns based on a systematic reporting of information by third parties, a full taxation of all assets at their market value with no exemption, high audit rates, and a high exit tax, it is possible that avoidance would be below 15%,” they wrote.
Sarin agreed that the estate tax is poorly enforced, and has numerous loopholes that make avoidance possible.
“I think where we disagree is that I would view this precedent as illustrative of the fact that taxes like this one are likely to be diluted by the same sorts of loopholes and tricks that make the estate tax raise much less than a naive estimation (like the one we and Saez and Zucman engage in) suggest that it should,” Sarin said. “The wealth tax’s proponents seem to believe that it will be unique relative to the history of tax policy in the US and won’t be watered down. Maybe. But I think the revenue estimates should engage with the possibility that the tax is more likely to be in line [with] our past experiences, rather than totally distinct from them.”
The Warren campaign says there are no loopholes or exemptions for different types of assets, that the IRS already has estate tax rules in place on how to value assets, and that her plan would increase funding for the IRS to crack down on evasion.
Sarin said the Saez and Zucman estimate might be “closer to right if their plan is to not exempt charitable giving from the wealth tax,” and said that they ought to be clear about that.
Asked about charitable donations, the Warren campaign told us that once you give your money away to charity, it’s no longer part of your wealth.
As for Pomerleau’s warning about the difficulty of enforcing a wealth tax, Saez said, “We think wealth is actually easy to measure in a modern economy with well defined property rights and a sophisticated financial sector. We envision systematic 3rd party reporting of all assets with market values. Unlisted stock is only about 20% of the assets of the super wealthy. We think there are ways to value those pretty accurately. For income tax, evasion rate is very low 2-3% when there is 3rd party reporting but huge (50%) when there is not (such as self-employed expenses).”
We take no position on these competing opinions about how much revenue the wealth tax would generate.
What has been the experience of other countries?
While as many as a dozen countries in Europe had a wealth tax in the early 1990s, that number has dropped to three as of 2018, according to an Organisation for Economic Co-operation and Development report. (In 2018, France replaced its net wealth tax with a new real estate wealth tax.)
“Decisions to repeal net wealth taxes have often been justified by efficiency and administrative concerns and by the observation that net wealth taxes have frequently failed to meet their redistributive goals,” the report stated. “The revenues collected from net wealth taxes have also, with a few exceptions, been very low.”
“Overall, the report concludes that from both an efficiency and equity perspective, there are limited arguments for having a net wealth tax in addition to broad-based personal capital income taxes and well-designed inheritance and gift taxes,” the report states. “While there are important similarities between personal capital income taxes and net wealth taxes, the report shows that net wealth taxes tend to be more distortive and less equitable. This is largely because they are imposed irrespective of the actual returns that taxpayers earn on their assets. The report also argues that capital income taxes alone will most likely not be enough to address wealth inequality and suggests the need to complement capital income taxes with a form of wealth taxation. The report finds that there is a strong case for an accompanying inheritance tax on efficiency, equity and administrative grounds.”
Sarin said the OECD report provides “international evidence on wealth taxation that shows that even wealth taxes that are imposed on a much larger swath of the population than Warren is contemplating raise much less than Saez and Zucman estimate. I don’t know how they reconcile these differences. I think their main point is that they are going to be much better on evasion, but as I said I’m skeptical that is going to be as significant as they seem to believe (though agreed that it’s really important to be better on tax compliance).”
Still, the authors of the OECD report wrote, “The report shows how a net wealth tax can serve as an imperfect substitute for taxes on personal capital income, on capital gains or on wealth transfers.”
The report then makes several recommendations to guard the effectiveness of a wealth tax — lessons learned from the European examples. Warren’s plan has attempted to incorporate many of those suggestions.
For example, the OECD report recommends a wealth tax only be levied on the very wealthy, that the rate should be low and exemptions and reliefs should be limited (to prevent those subject to the tax from moving assets into exempted categories), and that payments should be allowed in installments for those “facing liquidity constraints.” All of those are part of Warren’s plan.
Under the Warren plan, those with liquidity issues would be able to defer tax payments, with interest, for up to five years. And to guard against wealthy Americans simply moving out of the country to avoid the wealth tax, Warren’s plan would assess a one-time 40% “exit tax” on the net worth above $50 million for those who renounce their citizenship.
Many look to the example of Switzerland, which has the largest wealth tax. A 2016 National Bureau of Economic Research report looked at the effects of wealth taxation on reported wealth in Switzerland and estimated that “a 0.1 percentage-point rise in wealth taxation lowers reported wealth by 3.5% in aggregate.” (Or that a 1% wealth tax lowers reported wealth by 34.5%.)
One of the authors of the study, MIT economics professor Jonathan Gruber, said his research provides a “pessimistic” estimate that suggests “the [Warren] tax would raise less than 50% of the proposed total.”
“To be clear, Zucman and Saez were totally above board in their analysis,” Gruber said. “They noted that my estimate for Switzerland was much smaller than what you would get from other international studies, since the Swiss have only voluntary reporting of wealth.”
Still, he categorized the $2.75 trillion estimate as an “upward bound.”
Saez and Zucman say the study coauthored by Gruber is an outlier, and they point to several other studies that showed far smaller avoidance/evasion responses to the wealth tax in other countries. (See footnote 2.) They said their 15% tax avoidance/evasion response to a 2% wealth tax is based on the average across all four of those studies.
What do Americans think about Warren’s plan?
Warren has said her tax plan is not only generally popular in the U.S., but that even Republicans support it.
Indeed, several recent polls do show support for Warren’s plan. Among the nearly 2,000 surveyed in a Feb. 1-2 Morning Consult/Politico poll, 61% favored Warren’s wealth tax plan, including 50% of Republicans.
Similarly, an online New York Times poll in February found that 61% of Americans said they approved of imposing a 2% tax on the wealth of households with a net worth of more than $50 million, including a slim majority of Republicans. And in March, a Des Moines Register/MediaCom/CNN Iowa Poll of likely Democratic caucusgoers found 89% support new taxes that target people with more than $50 million in assets.
Finally, a Jan. 22-23 Business Insider-SurveyMonkey poll found that 54% of respondents approved of Warren’s idea. About 19% disapproved, and roughly 15% offered no opinion.
For what it’s worth, a group of 19 ultra-wealthy progressive Americans signed an open letter, published by Medium, calling on all 2020 presidential candidates to embrace a wealth tax, and specifically referencing Warren’s proposal as a worthy example.
The letter is signed by billionaires including financier and mega liberal donor George Soros, Facebook co-founder Chris Hughes and Disney heiress Abigail Disney.
“We are writing to call on all candidates for President, whether they are Republicans or Democrats, to support a moderate wealth tax on the fortunes of the richest 1/10 of the richest 1% of Americans — on us,” the letter reads. “America has a moral, ethical and economic responsibility to tax our wealth more. A wealth tax could help address the climate crisis, improve the economy, improve health outcomes, fairly create opportunity, and strengthen our democratic freedoms. Instituting a wealth tax is in the interest of our republic.”
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