The idea of a wealth tax on the rich has recently been brought to the fore by Sen. Elizabeth Warren and other presidential candidates in the Democratic primary. The proposal comes with several questions like how much money would a wealth tax raise? And how might taxing wealth affect the broader economy?
We at Penn Wharton Budget Model (PWBM) — a nonpartisan, independent, applied research organization housed at the Wharton School — attempted to answer these questions in a recent analysis. We projected the economic effects of the most recent version of Warren’s wealth tax proposal, which would impose a 2 percent tax on net worth above $50 million and a 6 percent tax on net worth above $1 billion.
Here are 5 key takeaways from our analysis.
1. Taxing wealth is an unfamiliar policy for the U.S. federal government.
This unfamiliarity means we have to draw on evidence from other countries’ experiences with taxing wealth, as well as our U.S.-specific tax expertise. This lets us project how taxpayers will respond to the new tax. For example, taxpayers may try to avoid the tax by moving money into certain types of assets or by hiding wealth.
2. This tax would raise between $1 trillion to $1.4 trillion less over 10 years than estimated by the Warren campaign.
Our conventional revenue estimate, accounting for the taxpayer behavior discussed above, finds that the proposal would raise $2.7 trillion over 10 years, which is about $1 trillion less than the Warren campaign’s estimate. There are several reasons for this gap, including differences in estimates of taxpayer responses and estimates of current wealth concentration.
When we also account for macroeconomic effects, we find that the proposal would raise $2.4 trillion over the same time period, which is about $1.4 trillion less than the campaign’s estimate.
3. This tax would shrink the economy by 0.9 percent in 2050.
In the PWBM model, wealthy households subject to the tax decide to consume more and save less. As a result, there is a smaller stock of capital available to grow the economy.
Some of this negative effect is eased because, following a standard budget scoring convention, we assume that wealth tax revenue is used to reduce federal budget deficits. All else equal, lowering deficits gives a lasting boost to the economy by providing more national saving and larger capital stock.
4. If revenues go towards spending instead, this tax would shrink the economy between 1.1 and 2.1 percent by 2050.
Warren has announced several potential spending plans tied to the wealth tax, such as universal child care. To accommodate this, we also ran alternate scenarios in which the new tax revenues funded government programs.
The macroeconomic effects of the wealth tax depend on how this new revenue spending affects the overall productivity of the economy. We tested a range of assumptions, but even the most generous productivity boost is not enough to fully offset the negative economic effects of the wealth tax and growing federal debt.
5. Raising more revenue means less economic activity.
Ultimately, how much taxpayers are able to avoid the tax depends on specific choices about design and enforcement. We also ran scenarios without any avoidance. The trade-off here for policymakers is that more revenue through a higher effective tax rate, means less economic activity. With zero avoidance of the wealth tax, the economy would be between 1.4 and 3.5 percent smaller in 2050, depending on how the revenue is used.
— Kody Carmody of the Penn Wharton Budget Model
Posted: December 12, 2019