Sen. Warren’s wealth tax revenue estimates assume that ‘the rich’ will not change their behavior. That is unrealistic.
Taken together, the new spending proposals of Senators Sanders and Warren and Rep. Ocasio Cortez total about $42.5 trillion. You might be a little concerned by this. You might be looking at your paycheck and wondering just how much of it is going to be left after the taxes needed to fund this spending spree have been taken out.
Of course, that isn’t a problem if someone else is going to pay for it all. Rep. Ocasio Cortez proposes a new marginal top rate of tax of 70% on “the tippie-tops” earners to fund her ‘Green New Deal’. Sen. Warren claims that a new wealth tax on ‘the rich’ will help cover it.
Two problems with the wealth tax
There are two big problems with Sen. Warren’s proposal. First, it is unconstitutional.
Second, the estimates of the revenues it will bring in are based on hopelessly optimistic assumptions. She claims that the tax would bring in $2.7 trillion: just 6.3% of the $42.5 trillion new spending. But this assumes that ‘the rich’ in question will use zero legal tax shelters.
In fact, it has been known for centuries that taxes are incentives. That is why Peter the Great taxed beards: he wanted fewer beards. And the responses to these incentives – though predictable – aren’t always those the policymaker would wish for. When Britain’s Parliament taxed windows in 1696 as a proxy for a wealth tax, people simply bricked up their windows to reduce their liability.
Take a look at the picture below.
This is the oldest house in the village of Aveyron, France. It was built sometime in the 13th century. As you look up the building, you’ll see that the floors get larger. This is because the owner’s tax liability was assessed on the square footage of the ground floor. So, builders kept the ground floor as small as possible and recouped the floor space on the higher floors.
Taxes are incentives. Change them, and you’ll change behavior. Sen. Warren’s assumption that ‘the rich’ will make no response to her wealth tax is completely unrealistic.
John Phelan is an economist at the Center of the American Experiment.