A few weeks ago, Elizabeth Warren made huge news with her plan to finance "Medicare for All." But as part of it, the Massachusetts senator made a big change to one of her other major policy goals: she boosted the size of the wealth tax she wants to impose on the very rich: The top rate went from 3% to 6%, giving her trillions more dollars in theoretical revenue to fund the sweeping program.
Warren popularized a wealth tax early this year, and now, she and Vermont Sen. Bernie Sanders are the chief proponents of it on the campaign trail. We've compiled comprehensive information here on the basics of a wealth tax:
- What is it?
- Who would pay it?
- How would it address income inequality?
- Does the public support it?
- Can it bring in the money?
- Has it worked in other countries?
It's an annual tax on the net wealth a person holds — so, their assets minus their debts. Not just the income they bring in each year.
On the one hand, you can think of it as something like the property taxes people pay on their homes, but applied to all their wealth above a certain level. This is, in fact, a major way that Elizabeth Warren sells her wealth tax in her stump speech.
But then, on the other hand, it would be a new type of tax for the federal government to levy — property taxes are usually imposed at the local level, and estate taxes, while on wealth, are only imposed at death.
Which candidates are proposing a wealth tax?
Massachusetts Sen. Elizabeth Warren unveiled her wealth tax proposal in January. Vermont Sen. Bernie Sanders followed suit in September.
That said, candidates including Joe Biden, Cory Booker, and Julian Castro are proposing other ways to tax wealthy Americans' assets, as the Wall Street Journal's Richard Rubin explained in August. However, we're going to focus here on those annual wealth taxes Sanders and Warren have proposed.
(One additional fun fact: in 1999, Donald Trump proposed a one-time, 14.5% wealth tax on all people with net worths of $10 million or more — or around $15.3 million in today's dollars. That's a higher rate and a lower wealth threshold than either Warren or Sanders are proposing... but then, it was also proposed as a one-time tax.)
You most likely wouldn't have to pay it. Sanders' tax would only affect people with wealth of over $32 million, and Warren's tax would affect only people with $50 million and over.
That means that this year, Sanders' plan would affect around 182,000 people, and Warren's plan would affect 70,000, according to estimates from Emmanuel Saez and Gabriel Zucman, two economists who back a wealth tax and did revenue estimates for Warren and Sanders' campaigns.
But if you do happen to be a multimillionaire, how much you pay would differ between these two plans. Warren's has two tax brackets: 2% for people with $50 million or more in assets and 6% for assets above $1 billion. (Initially, Warren had proposed a 3% tax for people with wealth of over $1 billion, but then she bumped that to 6% when she released her plan to pay for single-payer health care.)
Sanders, meanwhile, has eight brackets. He would start at a 1% tax on wealth over $32 million, and gradually bump up to 8% for wealth above $10 billion.
Very. And proposing a wealth tax is the most aggressive way these candidates are trying to address that.
Data from the Federal Reserve shows that the top 1% owned nearly one-quarter of all U.S. household wealth 30 years ago...and now owns nearly one-third. Meanwhile, the bottom 50% of people have gone from 3.7% of the wealth in 1989 to 1.9% today.
And indeed, wealth inequality is so much bigger than income inequality. As of 2016, the median family income in the U.S. was nearly $65,000 — not quite one-third of what the 90th percentile household had. But the median family wealth was around one-twelfth of the 90th-percentile family, with nearly $1.2 million. (The ratio for the 10th-percentile household to 90th-percentile is far more gaping — the 10th-percentile family has -$950 in wealth.)
The racial wealth divides are particularly gaping. As of 2016, the median white family held nearly five times the wealth of the median Hispanic family and more than six times the median black family.
On top of that, wealth inequality tends to be self-reinforcing — people make money off their wealth (via returns on whatever investments they've made), giving themselves more wealth.
In pitching his wealth tax, Sanders emphasizes cutting billionaires down to size. As he told the New York Times, "I don't think that billionaires should exist." (Warren has said she disagrees with this.)
And indeed, his top rate is 8% — which means it would be more effective than Warren's top 6% rate at eroding billionaires' fortunes over time.
The S&P 500's average return between 1957 and 2018 was around 8%, according to Investopedia — so an 8% wealth tax would wipe out that kind of investement gain (whereas a 6% tax would vastly reduce it).
A wealth tax polls very well — including among Republicans. In July, a poll from the New York Times and Survey Monkey found that two-thirds of all Americans, including 55% of Republicans, approved of a 2% wealth tax on all people with wealth over $50 million.
As far as how the people paying the tax would feel, opinions are split. On the one hand, 20 self-identified members of the top 0.1% in June published an open letter calling for a "moderate" wealth tax.
But then, there are of course some wealthy Americans who are not nearly as sanguine about this type of tax.
Perhaps most famously (or infamously, depending on how you look at it), billionaire investor Leon Cooperman has been vocally opposed to Warren's tax proposal.
"What is wrong with billionaires? You can become a billionaire by developing products and services that people will pay for," Cooperman told Politico. "I believe in a progressive income tax and the rich paying more." But he added that this is an attack on "the American dream."
Of course, opposition from rich Americans just reinforces Warren's messaging, which she acknowledged when she retweeted a CNBC clip about Wall Street titans opposing her candidacy.
"I'm Elizabeth Warren, and I approve this message," she wrote.
I'm Elizabeth Warren and I approve this message. https://t.co/2Ewkbm0ZwA— Elizabeth Warren (@ewarren) September 10, 2019
Well, first things first. Some tax experts argue that it would be unconstitutional. So: it very well might not look like anything. (For their part, Warren's office has released a series of letters from legal experts asserting that such a tax would be constitutional.)
But. OK. Let's say it is passed and put into place. There is a lot of debate about how realistic the campaigns' revenue estimates are. In part, figuring out revenue estimations is a problem of imperfect information.
"Knowing how much wealth there is in the country is something of a challenge because we don't have perfect data on that," says Janet Holtzblatt, senior fellow at the Urban-Brookings Tax Policy Center.
The handful of sources for this data — the Federal Reserve, the Forbes 400 list of wealthiest Americans — are all imperfect in their own ways. And on top of that, estimating revenue requires attempting to guess how much the rich will succeed in evading such a tax.
Saez and Zucman cite evasion estimates as low as 1 to 3% in some European countries. And then there was Switzerland, where a 1% wealth tax lowered reported wealth by up to 34%.
What would the rate be in the U.S.? Saez and Zucman averaged these together to come up with a 15% "leakage rate" to score Warren's proposal, and they used a similar rate, 16%, for Sanders' proposal.
But that may well be very off. Indeed, it's one aspect of their estimates that former Treasury Secretary Larry Summers and the Wharton School's Natasha Sarin criticizes in a Washington Post op-ed that said Saez and Zucman's revenue estimates were far too high.
Without getting too deep into the math here, the back and forth has emphasized just how difficult it is to create good (and widely agreed-upon) estimates for such a massive policy change.
How would the IRS even know how much people's assets are worth?
This is another big question as to how well a wealth tax would fare.
"The thing to remember is that really wealthy people don't hold all their assets in easy-to-value areas like stocks and bonds," said John Koskinen, former commissioner of the IRS. "A lot of them have artwork that's worth a lot of money. A lot of them have investments in privately held corporations or in investment vehicles that do not give regular valuations."
It would also require figuring out how exactly to calculate those valuations, when the balances of bank accounts can vary over a year, not to mention the fluctuating values of things like stocks and artwork.
These are not necessarily insurmountable hurdles, but they are examples of the amount of regulatory and logistical work that would have to be done to implement such a tax.
"It doesn't self execute as if people just file a sheet of paper and then pay a tax," Koskinen said.
"The wealthy are different from us in that they have the resources to hire the best lawyers," says Holtzblatt. She adds that the higher the tax, the more avoidance there's likely to be. "You also see an additional reduction for each 1% increase in the rate. And that's likely to increase a ton because tax lawyers get more savvy. They get more sophisticated."
The campaigns have their own ideas of how to keep avoidance in check. The Sanders campaign has said it wants to create a "national wealth registry and significant additional third party reporting requirements."
The campaign also argued to NPR that the IRS already has tools in place to measure wealth via the estate tax. This includes coming up with even difficult-to-calculate valuations — for example, an Art Advisory Panel meets regularly to assess the values of expensive artworks.
Warren's campaign likewise proposes "a significant increase in the IRS enforcement budget," as well as a "minimum audit rate" for wealthy taxpayers and an "exit tax" to discourage the wealthy from expatriating.
Saez and Zucman have also proposed a number of enforcement measures, including having financial institutions report wealth data to the IRS, obtaining real estate values from local governments, and using state databases to obtain the values of vehicles.
As of 1990, 12 OECD countries had wealth taxes in place. Now, three do.
And this is a statistic that wealth tax opponents often point to as evidence against wealth taxes. There were a few reasons why these countries repealed these taxes, as NPR's Greg Rosalsky reported in March: they were tough to enforce, they led to rich people fleeing the country, and they didn't bring in a lot of revenue.
But then, the campaigns have their proposals for increased enforcement. As Warren told Rosalsky, "I specifically designed this proposal to account for lessons learned from wealth taxes in other countries."
And unlike the wealth taxes in several European countries, the thresholds for Warren and Sanders' taxes start in the tens of millions, meaning they'd only be imposed on the richest of the rich.