Economy & Business

What Elizabeth Warren Doesn’t Get about Taxes

Sen. Elizabeth Warren speaks to reporters on Capitol Hill in 2017. (Aaron P. Bernstein/Reuters)
The Massachusetts senator proposes to use some of the most economically damaging forms of taxation in a misguided attempt to help the poor.

This week, Senator Elizabeth Warren’s 2020 presidential campaign unveiled a radical proposal to levy a minimum 7 percent corporate tax on U.S. companies making more than $100 million annually, with the goal of raising around $1 trillion in new revenue. This comes on the heels of Warren’s proposal to institute a new 2 percent wealth tax on all individual fortunes above $50 million and an additional 1 percent tax on all fortunes above $1 billion with the objective of reducing wealth inequality.

Unfortunately, the higher corporate taxes and wealth taxes Senator Warren advocates are among the most inefficient ways of raising tax revenue without harming the economy.

Corporate taxes have been shown to be significantly less efficient in raising tax revenue than individual income taxes or sales taxes. The ease with which corporations can establish offshore subsidiaries to avoid taxes or engage in tax inversions significantly contributed to the corporate-tax-revenue and capital-investment shortfalls seen in America in recent years. Indeed, many European countries had already recognized the inefficiency of corporate taxation and reduced their corporate-tax rates well before the U.S. did so as part of the Tax Cuts and Jobs Act of 2017.

The significantly positive macroeconomic data reported for 2018, the first year that tax-reform package went into effect, includes 7 percent growth in non-residential fixed investment, 2 percent real-wage growth and 3 percent GDP growth. Academic research shows that this is no coincidence. Several studies of prior corporate-tax reforms have found that lower corporate-tax rates are associated with higher wage growth and higher rates of capital spending on buildings, property, and equipment.

Senator Warren’s 7 percent minimum tax on corporate income would likely reverse these recent positive economic trends and lead to slower growth in investment and wages, in part because it would also disincentivize the automatic expensing of capital equipment. Lower wages, hiring, and investment means less government tax revenue.

As for the new wealth taxes Warren proposes, the example of Europe is instructive there, too. Only three European countries (Norway, Spain, and Switzerland) still impose annual wealth taxes today, down from twelve in 1990. The change was fueled by a growing recognition that wealth taxes very often lead to capital flight as wealthy individuals re-domicile to lower-tax jurisdictions, taking their income-tax dollars with them. France’s now-abandoned wealth tax, for example, is estimated to have contributed to the departure of some 42,000 millionaires from the country between 2000 and 2012.

Senator Warren’s proposals rely on a fundamentally misleading use of inequality as a political weapon. Academic inequality research, which often focuses on pre-tax income, fails to highlight how generous America’s existing tax-and-transfer system is by neglecting to show the impact of the already-progressive U.S. income-tax code and non-cash public benefits like Medicaid and Section 8 housing. Inequality data also often neglect trends in absolute levels of income by suggesting that income is a zero-sum game, a fixed pie. For instance, if someone in the lower income quintiles sees a 2 percent increase in their income while someone in the top 20 percent of incomes sees a 3 percent increase in their income, all else being equal relative inequality metrics rise, while everyone is actually better off on an absolute-dollar basis.

A thoughtful anti-poverty proposal might recognize that the rise of onerous government regulations such as zoning and occupational-licensing laws has held back the poor and contributed to the recent rise in income inequality. Limiting the government’s intervention in housing and labor markets could reverse growing inequality, make the poor better off, and grow the economy. Senator Warren’s corporate-tax hikes and new wealth taxes would, by contrast, hurt the very impoverished Americans they aim to help — and everyone else, to boot.

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