Most taxes exist as a necessary evil.
The United States government taxes people’s income not because it wants them to earn less income, but because it is a way to raise a lot of money. States tax retail sales not to discourage people from buying stuff, but because it is a relatively efficient way to fill state coffers to pay for things like public schools and state highways.
But for some taxes, discouraging the thing being taxed is at least partly the point. Tobacco taxes are intended not just to raise money, but also to increase the prices of cigarettes so that fewer people smoke. A tax on carbon emissions would be intended to reduce carbon emissions.
Elizabeth Warren’s new plan to pay for health care would be the second type of tax. It would, over time, create a world in which there are considerably fewer billionaires.She now proposes a wealth tax of 6 percent for fortunes over $1 billion, twice the rate of her earlier proposal. Bernie Sanders’s wealth tax proposal has a top rate of 8 percent. Either planwould, if enacted, deplete current fortunes and result in fewer such fortunes in the future.
Ms. Warren tends not to describe the elimination of mega-wealth as desirable on its own terms, but rather emphasizes how it might generate revenue to pay for progressive goals that help the working class. (Mr. Sanders, with similar policy ideas, is more blunt about his desire to reduce the number of billionaires.)
But the combination of policies they propose would work like a Pigovian tax, the term for a tax intended to reduce the prevalence of whatever it targets.
If, as Ms. Warren proposes, the revenue were directed to fund “Medicare for all,” it would also amount to a sea change in how the United States funds social insurance benefits. Currently, programs like Social Security are funded by taxes drawn from all earners, with benefits at least somewhat linked to contributions.
“It’s a sharp difference from what we’ve done with Social Security and Medicare Part A and unemployment insurance,” said Alan Viard, a resident fellow at the American Enterprise Institute. “Relying on a relatively small, extremely affluent group is a different approach.”
In addition to putting much of the burden of paying for Medicare for all on the richest people, the relatively high wealth taxes that Ms. Warren and Mr. Sanders propose would combine with other Democratic proposals to eventually thin their ranks.
“If it were enacted, it would definitely reduce the wealth of the very rich by a lot, and the effects would accumulate over time,” said Leonard Burman, a tax expert at the Urban Institute.
The math looks like this: For a rich family’s assets that either appreciate over time slowly or not at all (like houses, fine art and yachts), the 6 percent wealth tax would purely reduce wealth — much faster, for example, than local property taxes on real estate holdings that tend to be between 1 percent and 2 percent in much of the country.
For safe investments like bank deposits or municipal bonds, a 2 or 3 percent wealth tax may well eat up around 100 percent of interest earnings, meaning those savings might hold steady over time, whereas a 6 or 8 percent tax would reduce wealth.
The same family might earn well more than 6 percent or 8 percent on higher-risk investments, like holdings of stock in a company or private equity funds, meaning they could still accumulate wealth, even with a wealth tax. But they would have other new taxes to contend with.
Notably, Ms. Warren’s Medicare for all funding plan also includes an idea to require investors to pay capital gains taxes each year as their assets rise in value. Current law allows investors to delay any capital gains bill until they sell an investment, so people can accrue vast fortunes without ever paying taxes on the wealth. This would be harder to do with annual capital gains tax obligations.
Moreover, the existence of these taxes would increase the incentive for a rich person to take steps to avoid taxes, many of which would have the similar effect of reducing their wealth. If you are a billionaire planning to give much of your fortune to charity after your death, why not do so immediately to avoid spending decades paying a 6 percent annual tax to the government? Or, perhaps less nobly, why not spend it on leasing yachts or chartering private jets for fantastic vacations?
“We have that backdrop of avoidance strategies that reduce wealth, and layer on top of that the reduction in wealth from the mechanical payment of the tax,” said Greg Leiserson, chief economist at the Washington Center for Equitable Growth. “Both of those will lead to potentially dramatic reductions in wealth at the top of the distribution.”
There’s a lot that isn’t known about how a high wealth tax would affect rich families and the broader economy. The experience with wealth taxes overseas, including in Denmark and Switzerland, were at rates considerably lower than those now being debated in the United States.
The other wrinkle is when you think of wealth taxes as a Pigovian tax (named for Arthur C. Pigou, a British economist). When these taxes work as intended, the revenue they generate will tend to decline over time. For example, the Congressional Budget Office projects that federal revenue from tobacco taxes will be 19 percent lower in 2029 than the $12.7 billion it is projected to bring in this year.
Similarly, a president seeking to pay for a policy agenda with taxes on extreme wealth might want to think ahead to what should be done if those taxes result in there being a lot less extreme wealth to tax.