Sen Elizabeth Warren. D-Mass. is setting a great stage on her wealth tax proposal, which would tax assets rather than income. Not only does she intend it to be a way to punish rich people for having too much money, in her view, but also as a way to raise money for her various policy proposals such as the Green New Deal and Medicare for all. However, as Fox News suggests, an independent, nonpartisan analysis of the scheme might cause Warren to want to think again.
“A University of Pennsylvania Penn Wharton Budget Model – which offers a nonpartisan analysis of public policy proposals – estimates, though, that Warren’s tax would raise between $2.3 trillion to $2.7 trillion over a decade. That’s as much as $1.4 trillion less than the Warren campaign’s estimates. The analysis was released on Thursday.
“It also concludes that the new taxes would cause the economy to contract between 0.9 percent and 2.1 percent by 2050 — depending on how the new revenue is spent. The model says the new tax would reduce ‘private capital formation’ enough to drive the U.S. economy’s average wage down between 0.9 percent and 2.3 percent, even affecting households not rich enough to qualify for the tax.”
The analysis suggests that a truism known to supply-side economists for the past 40 years will affect Warren’s wealth tax scheme. Tax rates have two effects, arithmetic and economic. The former states that the higher tax rates are increased, the more tax revenues are created. However, tax rates also affect the economy. The Heritage Foundation explains.
“The economic effect, however, recognizes the positive impact that lower tax rates have on work, output, and employment–and thereby the tax base–by providing incentives to increase these activities. Raising tax rates has the opposite economic effect by penalizing participation in the taxed activities.”
The insight, which is centuries old, led to the so-called Laffer Curve, developed by supply-side economist Arthur Laffer. Laffer suggested that after a certai8n point, tax rates have diminishing returns as the higher they go, the less economic activity occurs. That phenomenon is why presidents ranging from JFK to Reagan to Trump have lowered taxes to generate more economic growth and job creation.
The Wharton study suggests that the phenomenon would exist for a wealth tax. It’s not hard to understand. If the government takes money from the net wealth of rich people, the less they will have to invest in new business ventures. Private wealth would not be available to pay workers and build new businesses, putting a wet blanket on the economy. Moreover, people who are affected by the wealth tax will scramble to conceal their money from the tax authorities, by both legal and illegal means.
A real-world example exists of how wealth taxes kill economic growth. Business Insider notes that several European Countries imposed wealth taxes, only to be obliged to repeal them in short order. The taxes cost too much to administer and resulted in too many wealthy people fleeing the countries where they had been imposed.
Warren. Naturally, disputes those conclusions of the Wharton study. She claimed that she had consulted several economists and tax experts and they told her that her wealth tax would generate the amount of money that she says it does. Besides, she adds, the wealthy are not paying their “fair share” of taxes and deserve to have their money taken away from them. Supporters of the Warren wealth tax suggest that those who have crafted it have learned from the mistakes of the European versions. It contains safeguards against rich people leaving the country along with their money.
The Fox story notes that the idea of a wealth tax has one advantage for Warren and for Bernie Sanders, who has proposed his version. A wealth tax is popular among Democratic primary voters. She hopes to ride her proposal to the Democratic nomination and then to a general election victory, running against just the sort of billionaire that she and other liberals loathe and despise.
However, as the Wharton study suggests, the math for Warren’s tax and spending plans continue not to add up. That fact counts against it both as a campaign issue and a serious policy proposal.