The Case for Wealth Taxation

Inequality in Society

The Case for Wealth Taxation

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The emergence of Joe Biden as the unassailable front-runner in the Democratic Primary belies a contest that at various turns broke new ground. From its unprecedented field, larger and more representative than ever (save the brief participation of two billionaires), to the remarkable resuscitation of one moribund campaign, the departure from custom was clear. Nowhere was this more obvious than in policy, where the inclusion of senators, Elizabeth Warren and Bernie Sanders, dragged the conversation leftwards into distinctly uncharted territory. While all candidates acknowledged America’s extreme inequality and the need for better healthcare, social security, etc., divergence came in the prescribed means of redistribution, and unusually discussion extended beyond familiar calls to raise income tax for the rich. Most liberal of the proposals was a wealth tax: an annual tax on everything an individual owns. Its mere suggestion confirmed an improbable rise of a policy that until recently was dismissed as fringe and anti-aspirational.

Whether America will see a wealth tax in the foreseeable future is moot - certainly, vested interests will leave no stone unturned in its attempt to thwart it. Nevertheless, it’s now part of the conversation, and its growing popularity among the public suggests it’s here to stay. But why now? How do we explain the ‘resurgence of interest in tax policy research’ that wealth taxation proposals have helped spark, and the American Economic Association (AEA) has so excitedly observed?

Gaining popularity

In many ways, its popularisation is surprising in how slow it’s been, for extreme wealth inequality, which it explicitly targets, has long been a sad fact of American life - and current trends offer little reason for future optimism. Over a decade ago, President Obama described it as ‘the defining challenge of our time’, hoping, implicitly, that his tackling of it would become his defining success. Despite these aspirations his administration did little to affect the underlying economic factors that contributed to its spread. That’s not to say no progress was made; it's rather to recognise that tweaking income tax rates and gently increasing tax subsidies for low-wage workers, while praiseworthy, were insufficient to reverse the effects of decades of regressive tax policies and deregulation. 

Consider: between 1995 and 2016 the net worth of the top one percent almost tripled, the middle class’s barely budged, and the bottom ten percent - those most vulnerable - saw theirs shrink. Clearly, the social mobility that Americans hold so dear, and upon which their collective sense of self rests, has ground to a halt - and conservative adjustments to taxation have failed to reanimate it. Wealth taxation presents a bolder approach; it's found appeal for that reason.

Its champions

Building on the work of Thomas Piketty, who catapulted the idea of wealth taxation into the mainstream, fellow French economists, Gabriel Zucman and Emmanuel Saez, have become its most public advocates. The pair came to prominence with the publication of their 2018 book, The Triumph for Injustice, which disputed the accuracy of previous estimates of inequality, claiming they had underplayed its existence. By their estimates, the top tenth of one percent of Americans (fewer than 250,000 adults) held 19.3 percent of all wealth in 2018. Their conclusion, like Piketty’s, was that wealth has to be taxed. The book sent shockwaves through policy circles, galvanising the left. Its key messages were assimilated into the tax reforms of both Warren and Sanders, the senators claiming their respective wealth taxes would earn $3.75 and $5.35 trillion over the next decade.

What the critics say

In a society so fiercely individualistic and inherently sceptical of government intervention, such proposals have predictably come up against staunch opposition. Of the criticisms levelled, there are a number that reappear, around which rebuttals tend to coalesce. The most popular of these is that it’s been tried before, and it failed. Critics like to recall that in 1990, twelve members of the Organisation for Economic Cooperation and Development (OECD) had wealth taxes, and now only three remain - both Germany and Sweden among those that rejected it. If, as Larry Summers contends, ‘the most egalitarian European societies’ can’t make it work, what chance do the Americans?

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the case for wealth taxationIn defence

Ignoring that in most instances the tax was removed by conservative incumbents, this interpretation is still superficial. For one, Europe, unlike America, allows for tax competition, meaning a rich, tax-averse business person in Paris, need only cross the border to Belgium to avoid the grasping French taxman. This was a huge problem - while in operation the rich had little issue resettling, and EU member states have never taxed their nationals living abroad.

America would not face this problem, as US tax responsibilities aren’t so easily escaped - certainly, moving to Canada would offer no refuge. For unlike any other nation, Americans remain answerable to their revenue service, the IRS, wherever they live, and only become exempt if they renounce their citizenship. As a disincentive to do so, under both Warren and Sanders’ proposals renunciation would accrue an exit tax of 40 percent on net worth.

Enforcement for the US would be less of a problem, too. The Europeans have tolerated a high-level of tax evasion as leaks like the Panama Papers have shown, and were never able - or willing - to legislate meaningfully against it. In contrast, America has been far more assertive. The Foreign Account Tax Compliance Act, for instance, demands all foreign financial institutions send detailed information to the IRS about the accounts of Americans each year, or face sanctions. Almost all cooperate, and tax is duly collected.

The European failure also owed much to the number of exemptions and deductions that were added, which eventually rendered it non-functional. Each year, as pressure applied by the rich grew, items that had previously ‘contributed to wealth’ were struck off. Paintings were exempted, main homes received reductions, etc. In large part, this was because the tax began at around one million euros, meaning many had to pay it, which led to a greater level of pushback, and eventually a longer list of exemptions. America need not fall into this trap. Warren and Sanders’ proposals show that to be lucrative, it’s only necessary to target the super rich, the 0.01%. This demarcation would help maximise support and minimise opposition.

Is it workable? Is it worth it?

Outside of comparisons with Europe, many question the policy’s basic workability. How, for instance, is taxable wealth calculated? With money wrapped up in art and real estate, tracking and then calculating wealth would be a difficult and time consuming task, likely involving thousands of civil servants. It overlooks, however, the form that the wealth of the super-rich increasingly takes: stocks in publicly traded corporations which often they themselves have founded. Amazon founder, Jeff Bezos, for example, has an annual salary that earns him a reported $81,840, while his net worth stands at $156 billion. His wealth derives largely from his stocks in Amazon. Taxing these untapped financial assets would raise billions, and relieve some of the pressure, financial or otherwise, in locating and valuing art, real estate, or whatever form wealth takes. And if a few Monets are left slightly undertaxed, so be it.

Now’s the time

Others remain unconvinced that the concentrations of wealth claimed by the likes of Piketty, Zucman, and Saez even exist. Which itself raises an interesting point. The best way to ascertain whether a wealth tax is necessary is to impose a wealth tax, as it’s the best possible source of wealth data. If the wealth is there, in the quantities and concentration believed, it will be taxed, hugely increasing government revenue. Free childcare, tuition, and healthcare, policies that hit at the heart of inequality, would suddenly become feasible goals. Society could be transformed. If it’s not there, the tax can be repealed - but at least we would know. With support among the public growing, crossing party lines, is this not reason enough?