Tax the Wealthy? Assessing the Warren and Sanders Wealth Tax Proposals

By Shahar Rotberg* and Joseph B. Steinberg (University of Toronto)**

Wealth taxes have recently received extensive media coverage as wealth concentration in the U.S. is hitting new heights. The increasingly higher concentration of wealth in the U.S. can be seen in the graph above: the wealthiest 0.1% of U.S. households, representing only about 125,000 households, own an increasingly larger share of the net wealth in the U.S. economy, rising from 11% of all net wealth in 1988 to 15% in 2015. In contrast, households who occupy the bottom 90% of the wealth distribution, representing about 115,000,000 households, own an increasingly lower share of the net wealth in the U.S. economy, dropping from 33% of all net wealth in 1988 to only 23% in 2015. To combat this trend, various economists, such as Thomas Piketty, and politicians, such as Senator Elizabeth Warren, have been pushing to impose wealth taxes on the rich.

Widely covered by media outlets, Senators Elizabeth Warren and Bernie Sanders have proposed to tax the top 0.1% of the wealthiest Americans. Warren’s proposal is to tax every dollar of net worth above $50 million at 2%, and every dollar above $1 billion at 3%. Sanders’ policy is even more aggressive than Warren’s, starting with a 1% tax on every dollar above $32 million and reaching an 8% tax on every dollar over $10 billion.

It is estimated by Berkeley economists Emmanuel Saez and Gabriel Zucman that these policies would raise at least 1% of GDP in tax revenues per year during the first 10 years. These revenues, as Warren and Sanders propose, would enable the U.S. government to provide more public services such as more public housing and better health care. 

In contrast, economists like Larry Summers argue that taxing the wealthy would result in capital fleeing the U.S., which would lead to a contraction in GDP, a reduction in the demand for labor, and to lower wages and higher rates of unemployment.

Would taxing the wealthy truly curb wealth inequality? Who would win and who would lose from wealth taxes on the wealthy?

We study these questions with an economic model in which entrepreneurs are the driving force for production and demand for workers. The novelty in our model is that we allow rich households to hide a portion of their wealth either onshore or offshore.

Hiding wealth onshore means that rich households keep their wealth in the U.S. economy and simply find ways to avoid paying the wealth tax. In contrast, hiding wealth offshore means that wealthy households move their wealth to another country to hide it from the tax authorities. This wealth, therefore, is out of the local economy and cannot be used for production purposes.

We start by getting the model to match key facts currently observed in the U.S. economy, such as the share of net wealth owned by the wealthiest 0.1% of households and the ratio of net wealth to GDP. Then, we use our model to assess the potential impacts of the Warren and Sanders policies under two different scenarios: 1) hidden wealth staying onshore, and 2) hidden wealth moving offshore. We assume that any additional revenues collected by the government would be used to increase public services, which are valued by households in our model.

We analyze the long-term as well as the short-term impacts of these policies. We find that the Warren and Sanders policies are quite effective at curbing the share of wealth held by the wealthiest 0.1% of Americans, reducing it by 30-50%. However,  the side-effect of these policies is that they cause GDP to contract by 1%-2.7% as a result of the dis-incentive to save (and in the case in which wealth moves offshore, also due to the fact that significant amounts of wealth are not used in local production).

Moreover, we find that the Warren and Sanders policies would primarily benefit successful entrepreneurs who are not subject to the wealth tax, as they face less competition from the very wealthy who shrink their large operations. Interestingly, we find that workers only mildly benefit from these policies when wealth stays onshore, but could even lose if the wealthy hide their wealth offshore, because in this case GDP shrinks more substantially and government revenues only mildly increase. When wealth is moved offshore, public support for these policies is below 30% and the policies mostly hurt the very households Warren and Sanders aim to help.

Lastly, we find that when the wealthy move their wealth offshore, the impact of these policies on GDP is immediate and substantial, leading to low public support and negative gains. Policies makers should pay attention to these findings before moving forward.

*Disclaimer: This work was written by Shahar Rotberg on his own time and capacity, and the views expressed herein do not represent the views and opinions of the Canada Mortgage and Housing Corporation. **Joseph B. Steinberg is an Assistant Professor in the Department of Economics at the University of Toronto.