The wealth tax proposed by Democratic presidential candidate Elizabeth Warren would raise over $1 trillion less than her campaign predicts, according to a new study by the Penn-Wharton Budget Model (PWBM).
Different assumptions about tax avoidance and evasion behavior of the ultrawealthy are the biggest drivers of the gap between Warren’s estimates and those of the PWBM, which showed that Warren’s plan would raise $2.7 trillion over a decade, disregarding macroeconomic feedback, compared to the $3.75 trillion projected by Warren’s campaign.
Earlier this year, the Massachusetts senator proposed a 2 percent annual wealth tax on taxpayers with household wealth in excess of $50 million, which ticks up to 3 percent starting at a $1 billion threshold. She later revised her proposal by bumping up the tax rate on billionaires to 6 percent.
The study found that assuming no tax avoidance occurs, Warren’s wealth tax could raise as much as $4.78 trillion over 10 years; under an extreme avoidance assumption, revenue growth is $1.41 trillion less.
The Warren campaign maintains that their proposal would come with “strong anti-evasion measures,” including a substantial boost in the IRS’s enforcement budget, minimum audit rates for the ultrawealthy, tighter valuation rules to prevent excessive discounts on asset worth, and no asset class exemptions from the tax.
“To be clear, PWBM’s best estimate on a conventional basis is a total revenue raise of $2.7 trillion,” according to the study. Including macroeconomic feedback effects yielded even less revenue — $2.29 trillion — because of negative effects of the tax on the overall economy, which reduces the tax base over time.
Making Assumptions
The model features “fairly aggressive” assumptions about tax avoidance behavior, PWBM director Kent Smetters acknowledged on a podcast posted the same day by the Wharton School of the University of Pennsylvania.
But, Smetters continued, their model is based on “reasonable avoidance mechanisms” that the PWBM came to by reviewing the experience of European wealth tax regimes and consulting tax experts, including former Treasury officials who worked on reducing tax avoidance in the past.
Their model counts both legal and illegal tax avoidance, but even determining what is illegal can be hard, as it’s sometimes unclear what avoidance actions are illegal until the Tax Court rules on them, Smetters added.
The PWBM acknowledged the speculative nature of assumptions about tax avoidance, noting that “ultimately . . . the amount of revenue raised will depend on policymakers’ specific choices about design and enforcement.”
Dueling Economists
University of California, Berkeley, economics professor Gabriel Zucman, who has been instrumental in advising and helping craft Warren’s tax proposal, responded to the study on Twitter by noting that the biggest source of the discrepancy between the PWBM’s estimates and those of the Warren campaign is how they estimate the effect of the 6 percent tax rate above $1 billion.
Zucman observed that the PWBM projects the extra billionaire tax to raise little additional revenue because it assumes the vast majority of the taxable wealth “disappears” through tax avoidance activity.
“It’s hard to predict avoidance. . . . But the wealth of billionaires is highly visible: estimated daily by Bloomberg; scrutinized by Forbes,” Zucman wrote. With robust enforcement measures in place, that wealth is unlikely to vanish, he said.
“We can be nihilistic doomsayers, or we can be plumbers, helping make taxes (and other public policies) work,” Zucman said.
However, Brian Riedl of the Manhattan Institute took issue with Zucman’s own assumed tax avoidance rate — 15 percent at both thresholds — arguing that it “ignores basic economic consensus that tax avoidance rises as tax rates rise,” which explains the PWBM’s drop in revenue at the higher tax rate on billionaires.
Assuming a 15 percent across-the-board tax avoidance rate further ignores the lessons learned from other countries’ wealth tax regimes, as well as lessons from other U.S. tax regimes, Riedl told Tax Notes.
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