Emmanuel Saez and Gabriel Zucman make two quite different claims about a progressive wealth tax. It is necessary, they say, not just to raise government revenue, but also to curb the injustice of our current system and to protect democracy from the ruinous effects of inequality.
While they make a convincing case against concentrated power, they fail to show why a wealth tax, and only a wealth tax, would effectively combat the ills they intend to address. Their central contentions—that such a policy would diminish the power to influence government policy, stifle competition, and shape ideology—are simply taken for granted. They devote hardly any space to their most import assertion, that the income of today’s superrich is earned at the expense of everyone else—and thus that everyone else’s well being will be improved if a wealth tax were implemented.
In fact, by their own estimates, the radical wealth tax they endorse would bring in less and less revenue over time, since it would erode very large fortunes and prevent new ones from being created. For the same reason, it would also reduce revenues raised by the capital gains tax, the income tax, and the estate tax. A radical wealth tax could thus leave the less well off worse than they are today. For their argument to work, the decline in wealth over time must produce meaningful gains for the average American. But there are a number of problems with this presumption.
First, a wealth tax would encourage existing wealth to be transferred overseas. The most straightforward way this can happen is for wealthy people to renounce their U.S. citizenship and move abroad. To discourage such defection, both the Warren and Sanders plans call for an exit tax on 40 percent of all wealth. That may seem like a hefty disincentive. But if the alternative is exposure to a wealth tax designed to erode fortunes to a very large extent over time, it may not be much of a disincentive after all.
Moreover, there would be an enormous incentive for the wealthy to attempt to avoid the exit tax by lowering the assessed value of their assets for the single year in which they leave. The economists Larry Summers and Natasha Sarin estimate the avoidance rate for the estate tax, a similar one-time levy, to be around 60 percent. An exit tax, which could be planned for far more effectively than one’s death, should see avoidance rates at least as high. That means the exit tax would amount to an effective rate of only 24 percent. For many of the very wealthy, that option would likely be far preferable to having their wealth eroded to a much greater degree over time.
So much for existing fortunes. But a wealth tax would also encourage entrepreneurs to leave the United States even before their fortunes are made. According to the Forbes 400, over half of the fifteen richest people in the United States made their fortunes within their lifetime. A wealth tax would incentivize them to have done so from Toronto or Vancouver rather than New York City or Silicon Valley. It is not clear how any of the issues that Zucman and Saez want to address would be improved by having by shifting the distribution of North American billionaires to Canada. It is more likely that, over time, the U.S. advantage in economic innovation would be eroded as a growing concentration of successful entrepreneurs abroad—in Canada, Singapore, or other potential wealth tax havens—lures venture capitalists and startups out of the United States.
Second, reducing wealth does not necessarily reduce power. Jeff Bezos is the wealthiest person in the United States, but a great deal of his power comes from his position as CEO of Amazon, of which he owns roughly 12 percent. If a wealth tax jeopardizes executives’ ability to hold on to their positions at the top of the companies they run, there would be even stronger incentive for them to leave the country. When I challenged Saez and Zucman on this point last fall, they responded that effective CEOs would not have to worry because they could still maintain the support of their board; the wealth tax would only make it easier for ineffective executives to be removed. Yet, to the extent that effectiveness is measured in increasing Amazon’s profits, Bezos retains every incentive, if not more incentive, to use Amazon’s size to influence government policy and stifle competition.
Third, a wealth tax will face enormous opposition from those who feel threatened by it. The super-wealthy are ideologically diverse. Some, including Bill Gates, are supporters of progressive causes, including some types of wealth tax. Others, such as the Koch brothers, are strong supporters of free market policy. By far, however, most donations by the super-wealthy are to non-political causes. By politicizing wealth itself, a wealth tax would encourage billionaires to enter the political process against it. Michael Bloomberg reportedly committed upwards of $2 billion toward a political campaign that was at least in part designed to prevent Bernie Sanders from getting the Democratic nomination.
Far from pushing the wealthy out of politics, then, the threat of policies such as a wealth tax appears to be drawing them in. Passing a wealth tax would do little to discourage this in the short term. Each year both the existing super-rich and the newly super-rich would face the prospect of donating to efforts to repeal the wealth tax or simply seeing their wealth eroded away. Over time, pressure to repeal the wealth tax would decline only if wealth creation were moved largely outside the United States.
All these factors suggest that a wealth tax would drive the already existing super-rich and those looking to become super rich outside of the United States. Once the center of wealth creation relocates, stable equilibrium might re-emerge. But control over large multinational corporations operating inside of the United States would remain with the same small set of founders and CEOs that run them today. In that case, what has the average American citizen gained? The overall U.S. economy will be weaker, and Americans will have less access to innovative companies and high-paying jobs. The country as a whole will be poorer, and the tax system would have less revenue.
There may be other ways to decrease economy inequality, encourage competition, and reduce the impact of money on politics, but a wealth tax isn’t it.