Sanders and Warren Can’t Explain the ‘After’ of Wealth Taxes

Bernie Sanders suggests billionaires should not exist. Elizabeth Warren comes close. Both of their wealth tax plans would eventually stop collecting money or at least stop collecting significant amounts because the wealth concentration would fall — according to their own assumptions.

(Let us skip the fact that wealth taxes might be unconstitutional for the purposes of this post.)

What happens to the programs they want to fund with these taxes when the taxes are gone?

Think about this: both Warren and Sanders would tax the wealthy at a higher rate than most wealth increases. Most of the wealthy limit their taxable incomes by investing in such vehicles as tax free municipal bonds, which have low but predictable rates of return. If the wealthy begin to sell securities or other assets, or stop buying such assets, those will also fall in value.

If wealth starts growing slower than inflation, that’s actually negative growth — a loss adjusted for inflation. Then, add in a tax that is close to inflation and the downward drift begins. Eventually… the wealthy end up at whatever level is set.

Now, there are some big plans for these tax revenues:

Wealth Tax Showdown : Planet Money : NPR:

Bernie’s team estimates the policy would slash billionaires’ fortunes in half over the next 15 years and raise $4.35 trillion over the next decade. Warren’s team says hers will raise $2.75 trillion over the same period. Like Warren, Bernie doesn’t have any issues figuring out how to spend the money. His campaign says it will “be used to fund Bernie’s affordable housing plan, universal childcare and would help fund Medicare for All.”

Okay, and what happens after the taxes stop rolling in (which will happen long before the grandiose estimates)? Someone will still need to pay for all these programs. And, as in Europe, this will be the middle class. Wealth taxes must give way to middle class tax increases if the wealth taxes do as intended. With fewer billionaires and even millionaires, someone will need to support the new programs. Surely the programs won’t be ended — programs seldom are cut.

But, again, let’s be honest. There won’t be the revenues dreamed of, so the tax brackets will need to be adjusted down, down, and down until there are enough people paying for all these dreamed of benefits.

Will it Work?

A few months ago, Planet Money made an episode on the subject of wealth taxes. The policy has been tried many times before overseas. It hasn’t worked out well. Wealth taxes were difficult to enforce, encouraged rich people to move their wealth out of the country, hurt the economy by distorting investment decisions and, in the end, they didn’t accomplish their main goal of raising lots of revenue.

Wait, Warren and Sanders proclaim. We have learned from European mistakes. We can tax people better! We can tax more, and more effectively.

To combat the problems seen with wealth taxes overseas, Bernie’s Tax on Extreme Wealth calls for expanding the role and power of the federal government. It calls for a “national wealth registry” and a major expansion of the IRS. And it includes an “exit tax,” which would confiscate 40 percent of a rich person’s wealth under $1 billion and 60 percent over $1 billion if they renounce their citizenship and try to escape the tax.

An entire department of wealth registration. That sounds like a great idea (not). And as the value of wealth falls, will this army shrink? I doubt it. All these new IRS and Dept. of Wealth Registration employees will be unionized federal employees. They won’t be going anywhere.

Remember, we could confiscate everything from the top 500 families and not pay for a year of what the federal government spends. That means we need to collect a lot more.

Warren and Sanders have models that assume the wealthy will somehow magically “re-earn” and “re-accumulate” the wealth they surrender to the federal government. That did not happen in Europe. Taking millions or even billions from the super-wealthy might feel great, but what if those same people decide to cap their investments and devalue their own wealth?

I’m not defending obscene salaries or benefits offered to CEOs and other executives. Eventually, workers won’t tolerate the pay gaps between top and bottom, and we’re closing in on that point. Still, that doesn’t make a wealth tax a good idea. It’s a feel good idea, based on unrealistic models and assumptions.

I support ideas such as employee seats on boards of directors. I’m okay with using social pressure for change.

I’m not okay with bad tax policy that might lead to the wealthy playing more games with their assets.