Arguments against a wealth tax based on the beleaguered history of the estate tax fail to account for fundamental differences between them.
“There are ways in which one can avoid the estate tax that don’t really work with a wealth tax,” New York University School of Law professor Lily Batchelder said during an October 23 panel hosted by the Graduate Center of the City University of New York.
Critics of a wealth tax, like former Treasury Secretary Lawrence Summers, have argued that the wealth tax proposals put forth by economists Gabriel Zucman and Emmanuel Saez — and adopted in different forms by some Democratic presidential candidates — would generate as much as 80 percent less revenue than Zucman and Saez have estimated.
Part of that is because of the many methodological differences in how economists estimate the amount of wealth that is really out there, and “on several of them, probably Zucman and Saez have the better case,” Batchelder said.
But a major sticking point has been over how much tax avoidance and evasion would take place under a wealth tax. Saez and Zucman have assumed a 15 percent avoidance and evasion rate, but Batchelder noted that “nobody knows for certain what that’s going to be.”
And although Summers and other critics have used avoidance and evasion under the federal estate and gift tax as a guide for what to expect under a wealth tax, Batchelder said the two aren’t exactly comparable. Estate and gift taxes are imposed once each generation, and “a lot of avoidance techniques involve taking that one point in time and artificially and temporarily devaluing assets that are transferred, and then lifting those restrictions,” she explained.
“That just doesn’t work under an annual wealth tax because then you’d have to keep those restrictions in place,” Batchelder added.
Critics have also argued that a loophole-ridden wealth tax is inevitable once lawmakers get around to drafting a proposal, but “I don’t think it’s fair to assume that a proposal will be changed in ways that the person is not proposing,” Batchelder said.
Batchelder also noted that an all-new wealth tax regime presents lawmakers the opportunity to work with a “blank slate” without existing loopholes, as opposed to dealing with estate and gift tax or income tax proposals based on existing tax regimes with lots of preferences already included.
Swing for the Fences
Democratic presidential candidates are split on how they want to tax the wealthy, but several panelists recommended an all-of-the-above approach.
Moderate candidates’ proposals to go back to Obama-era tax rates and fix some loopholes are “good to do, but it’s probably not going to dramatically change the picture of inequality in the U.S.,” Saez said at the panel discussion.
Saez and Zucman endorsed a four-prong approach to tax reform: corporate tax reform, individual tax reform, a wealth tax, and a national income tax.
Raising individual income tax rates is pointless without also addressing the corporate tax rate, according to Zucman. With the current low 21 percent corporate rate, if the top marginal individual rates alone increase, wealthy taxpayers will incorporate, and any income they don’t need could be consumed through the corporation, “so a progressive income tax becomes a consumption tax,” he explained.
But even if individual and corporate tax rates are addressed, the United States is still left with “the Warren Buffett problem,” Zucman continued. “If you had a 90 percent marginal income tax rate on taxable income, Buffett’s tax bill would change from zero percent of his true economic income to zero percent of his true economic income, which is still a bit too low,” he quipped.
That’s why a wealth tax is needed to pull revenue from accumulated wealth, Zucman said. An Elizabeth Warren-esque wealth tax alone would double the effective tax rate on billionaires, he said.
Finally, to raise revenue for the ambitious social policy programs that some presidential candidates are calling for, like Medicare for All, the United States should enact a national income tax, akin to a VAT, but broader and less regressive, Zucman said.
As for how widespread those reforms should be, panelist Paul Krugman said proponents of tax solutions to wealth inequality shouldn’t worry about going too far and exceeding their revenue maximization potential.
“The one thing that’s clear is that where we are now is way off to the side from where we ought to be, and anything that is likely to happen politically during the lifetime of any of us . . . is going to fall far short of where you want to go,” Krugman said.
None of the other European countries that are far more redistributive than the United States seem to have gone too far yet, Krugman said. “So the answer is just more, as much as we can get. However much of your tax reform or additional social programs we can get, take whatever you can, because you’re very unlikely to overshoot.”
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