Senator Elizabeth Warren, D-Mass, has proposed a dramatic shift of emphasis for the federal government's focus in taxing "the rich." Rather than looking to income, she wants an annual wealth tax, which would apply in addition to any other federal taxes due. A wealth tax is justified, according to Warren, because the share of wealth held by the top 0.1% of Americans has zoomed from 7% in the late 1970s to 20% by 2016. "Put another way, the richest 130,000 families in America now hold nearly as much wealth as the bottom 117 million families combined," according to her press release.

The exemption from the wealth tax would be $50 million. At family wealth levels above that cut-off, an annual tax of 2% would apply. A second 3% bracket kicks in at wealth levels above $1 billion (a "billionaire surtax"). The tax presumably would apply each year to unrealized capital gains. It would continue to apply during economic downturns, when family wealth is shrinking. Some 75,000 American households are projected to be snared by the tax, which would raise an estimated $2.75 trillion over ten years.

Any family that wanted to escape this annual tax bite by giving up American citizenship would be subject to a new 40% "exit tax" applied to its entire net worth.

Six American law professors from around the country have weighed in supporting the constitutionality of a wealth tax. The Tax Foundation, on the other hand, has criticized the proposal on administrative and economic grounds. Much family wealth is very difficult to value accurately on an ongoing basis. Interests in privately held businesses, real estate, art collections, and the like are much harder to value than publicly traded securities. Today wealthy individuals face the valuation puzzle only once, for paying death taxes. Having to do so every year would be a substantial burden (but a bonanza for tax lawyers and accountants). Wealth taxes have declined in popularity around the world due to their negative economic impacts--in 1990 12 OECD countries had wealth taxes, today only four do.

Congress is unlikely to act on Warren's proposal, but the idea could play a role in the 2020 elections.

(February 2019)
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