Isn’t a wealth tax common sense?

The wealth tax proposals advanced by Democratic US presidential primary contenders have drawn vehement criticism from many who should be supporting them.

I was not surprised when leading Democratic primary contenders began endorsing a ‘wealth tax’ along the lines of what has been proposed by my University of California, Berkeley, colleagues Gabriel Zucman and Emmanuel Saez. What has surprised me is the level of pushback these candidates have received, particularly from those who should be in favour of anything that moves the United States toward a more progressive tax system. 

When I first began studying public finance, I was taught that there were three principles of taxation, all stemming from the 17th-century French politician Jean-Baptiste Colbert’s dictum to ‘so [pluck] the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing’.

The first principle is always to broaden the tax base, so that you can hit your revenue target with the lowest possible (the least hiss-inducing) tax rates. The second is to tax items with inelastic demand, in order to minimise the tax system’s distortive effects on broader patterns of economic activity. Finally, the actors who should be taxed the most are those for whom the utility costs of paying taxes are the least—that is, the rich.

Keeping all three principles in mind, what is the broadest possible tax base upon which to tax the rich? It is their wealth, of course. And what good are the rich least willing to sacrifice in order to reduce their tax burden? Their wealth, of course.

High priority

Given these basic principles, it is obvious from a technocratic perspective that the tax system should contain a substantial wealth-tax component. Even those drawing on the work of economists Christophe Chamley and Ken Judd to argue that one should tax labour income in the long run seem to accept that establishing some level of wealth taxation should be a high priority in the immediate term.

That is why I was surprised to hear smart, sensible, public-spirited people opposing the wealth-tax proposals advanced by Elizabeth Warren, Bernie Sanders and others. According to Alan Viard of the American Enterprise Institute, it would be ‘simpler and more prudent’ to reform ‘the income tax and estate and gift taxes’ than to pursue a wealth tax. Likewise, William Gale of the Brookings Institution supports higher taxes on the wealthy, but then says that he is ‘not ready to buy [in] to the wealth tax yet for a lot of reasons’. And Karl Smith of the Tax Foundation believes a wealth tax would ‘undermine a central animating idea of American capitalism’.

Moreover, when Saez and Zucman presented their wealth-tax proposal for a Brookings Institution conference, they were met by a chorus of naysayers, with many fearing that the policy would reduce Americans’ willingness to make risky investments. Even my former co-author Dean Baker of the Center for Economic Policy Research worries that a wealth tax would strengthen the incentive for the rich to ‘hire accountants, lawyers, and other people engaged in the tax avoidance/evasion industry’.

Similarly, my good friend and long-time patron Lawrence Summers warns that a wealth tax could actually increase the influence of money in politics and policy-making, arguing that if the rich cannot keep their wealth to pass down to future generations, they will instead spend it shaping society in the here and now. Summers sees the push for a wealth tax as a distraction: ‘For progressives to invest their energy in a proposal that the Supreme Court has a better-than-50-per-cent chance of declaring unconstitutional … seems to me to potentially sacrifice an immense opportunity.’ Finally, the Tax Policy Center’s Janet Holtzblatt—who, as I learned back in 1993, is better at public finance than I am—notes that a wealth tax could come with ‘grave implementation and administrative challenges’.

Supreme Court

Summers’ point about a potential wasted opportunity seems cogent. For an effective wealth tax to prove lasting, the US would also need a government committed to doubling the size of the Supreme Court. Between Bush v Gore (2000), Citizens United v Federal Election Commission (2011) and Senate Republicans’ refusal even to hold hearings on Merrick Garland’s nomination [under the Barack Obama presidency], such a move is more than justified.

The concerns about administrative and enforcement problems are also understandable. Defining and assigning a value to the wealth (and incomes) of the rich would be an immense and difficult undertaking. To simplify matters, the Internal Revenue Service perhaps should be given just one task: either to tax all income, or to tax wealth and labour income.

Yet looking beyond these details, I cannot help but think that the discussion has gone badly wrong. A basic public-finance point seems to have been lost. It should be a settled technocratic doctrine that a wealth tax is the ideal way to tax the wealthy. As such, shouldn’t the burden of proof lie not with proponents of a wealth tax, but with all who would defend a status quo that departs from that ideal benchmark? I am genuinely puzzled and would love to hear a convincing response on that question.

Republication forbidden. Copyright Project Syndicate 2020 Isn’t a wealth tax common sense?