Magazine | October 14, 2019, Issue

Elizabeth Warren’s Wealth-Tax Trap

Sen. Elizabeth Warren speaks at a campaign rally at Keene State College in Keene, N.H., September 25, 2019. (Brian Snyder/Reuters)
A tax on wealth would be economically destructive, fiscally ineffective, and possibly unconstitutional

It seems like everyone is talking about the wealth tax. Many Democratic presidential hopefuls have endorsed it as a way to address income-inequality concerns. There is also the promise that it would raise much money from the richest Americans and pay for all the new entitlements Democrats think Americans lack. However, a careful examination of the evidence reveals that such a tax is unlikely to achieve any of these goals. It is also misguided, as the negative consequences from the tax will reach far beyond the richest Americans. 

Consider the version of a wealth tax proposed by Elizabeth Warren. She was inspired by the work of French economist Thomas Piketty, who made the case for a global wealth tax in his blockbuster 2014 volume Capital in the 21st Century. Since then, Warren has tapped the research of UC Berkeley economists Emmanuel Saez and Gabriel Zucman (each of whom is also French).

Senator Warren’s proposal is straightforward. It would target the “richest 0.1 percent of Americans.” Households with a net worth of $50 million or more would pay an annual tax of 2 percent on every dollar of net worth above $50 million and 3 percent on every dollar above $1 billion. Warren believes that with this wealth tax she can raise $2.75 trillion over ten years, which is a good thing because she has a ton of new programs that she would like to implement.

A main problem with her tax is that the net worth of a rich person isn’t as straightforward as proponents of wealth taxes would like you to believe. Net worth includes all assets, some of which are easier to value than others. The value of assets such as stocks, bonds, and real estate are pretty easy to measure. But many other assets — such as cryptocurrencies, trusts, and private businesses — are harder to assess.

That’s why wealth taxes are always so hard to administer and so easy to avoid. It makes them a terrible vehicle for raising money. And it explains why many governments used to have a wealth tax but few still do today. According to a paper by Daniel Bunn of the Tax Foundation, “the number of current OECD members that have collected revenue from net wealth taxes has grown from nine in 1965 to a peak of 14 in 1996 to just four in 2017.” He adds that “among those four OECD countries collecting revenues from net wealth taxes, revenues made up just 1.45 percent of total revenues on average in 2017.” Yes, it is a difficult tax to collect.

France was one of the four countries that had a wealth tax in 2017, but it dropped the tax in 2018. (Belgium adopted its own wealth tax, meaning that the total number of countries with a wealth tax today is still four.) I would think that if the French government — of all governments! — dropped the wealth tax, that should be a powerful clue that the levy isn’t all that Warren dreams it will be. But apparently the senator thinks she can avoid any problems by implementing anti-avoidance measures such as a repressive 40 percent exit tax on any targeted household that attempts to emigrate, minimum audit rates, and increased funding for IRS enforcement. Warren clearly doesn’t believe in freedom from persecution.

But there are deeper problems with a wealth tax. First, there seems to be a profound misunderstanding of what wealth is and where the money will come from. Listening to politicians who support the levy, you get a sense that rich people use their wealth almost exclusively to fund extravagant consumption. Tax their wealth and these rich people will simply downgrade their houses — and still be left with gigantic palaces — or otherwise reduce their unnecessary consumption expenditures.

Yet nothing could be further from the truth. Instead, that wealth is tied up in other wealth-producing activities. It’s invested in companies; it is used to fund R&D that will create better goods and services for consumers; it is the capital that innovators and producers borrow from banks to grow their businesses.

Over at the Tax Foundation, Kyle Pomerleau and Nicole Kaeding add that capital is easily spooked by higher tax rates — and the more mobile, the more easily it’s spooked. This sensitivity is heightened by the fact that the tax is applied to wealth that has already been subjected to the income tax. That’s the case, for instance, with dividends from corporate stocks. This double taxation obviously creates a real disincentive to accumulate capital. For all these reasons, the rich taxpayers who cut the IRS wealth-tax checks will be only a subset of those who will feel the burn from the tax. Every dollar that goes to the IRS to pay the new tax is one less dollar of capital that could be lent and/or invested for innovation, business expansion, and worker training. In short, economic growth that benefits us all, especially the poor and middle classes, will inevitably be slowed.

Incidentally, the wealth tax’s negative impact on investments was one of the reasons mentioned by the French government in 2017 for ending it. In its place, the government imposed a tax on real estate, which is easier to assess and is imposed on assets that are much less flighty than are equity and debt claims.

There is also a question as to whether a wealth tax in the United States would even be constitutional. Most experts will agree that, with the exception of the income tax, which is authorized by the 16th Amendment, the Constitution prohibits federal direct taxes that are not apportioned by population. The question then becomes whether the wealth tax is a direct or an indirect tax. On this point experts disagree. Even if implemented, the wealth tax may end up being tied up in the courts for years.

Finally, it is worth noting that the renewed interest in the wealth tax is based on concern about income inequality. The Piketty book, which itself was based in part on a 2003 paper by Piketty and Saez, fueled that narrative. Then, in 2016, Saez and Zucman, who are now advising Warren (while Piketty has endorsed her wealth-tax proposal), published a paper that found that the share of total wealth held by the top 1 percent in the U.S. increased from 24 percent in 1980 to 42 percent today. In recent years, however, a small but growing number of scholars (see the work of Scott Winship and Phillip Magness) have questioned the statistical foundations of these papers.

For instance, Magness highlights new findings by the Federal Reserve that offer a sharp departure from the Saez/Zucman narrative. The Distributional Financial Accounts (DFA) series of quarterly data on household wealth concentration from 1989 to the present shows that the wealth share of the top 1 percent increased from about 23 percent to 29 percent between 1989 and 2012. That’s significantly smaller than the 14-percentage-point jump reported by Saez and Zucman.

The Congressional Budget Office offers another perspective, this one using post-tax income measures, as opposed to the pre-tax measures used by the Berkeley economists. A recent paper by Stephen Rose at the Urban Institute looks at different studies across the economic spectrum. Rose reports that the findings by Piketty and Saez are outliers. It must be their French technique.

This matters because the widespread embrace of the Saez/Piketty/Zucman narrative about income inequality fuels the recently growing enthusiasm for a wealth tax in America. It would be a shame to base our tax policy on a flawed academic fad. In addition, an extensive academic-literature review performed by Scott Winship — who now heads the Social Capital Project for the Joint Economic Committee of Congress — and published in 2013 in National Affairs reveals that there is “little basis for thinking that inequality is at the root of our economic challenges, and therefore for believing that reducing inequality would meaningfully address our lagging growth, enable greater mobility, avert future financial crises, or secure America’s democratic institutions.”

If that is the case, making inequality reduction the be-all and end-all policy goal to justify the implementation of a wealth tax reveals either disdain for the findings of academic studies or a very serious and ugly dislike of wealthy people — or, perhaps, both.

I will conclude with a word of advice: Democrats should be careful that their relentless pursuit of much higher taxes on the wealthy doesn’t backfire. A new poll by the Cato Institute’s Emily Ekins finds that while 55 percent of Americans believe the distribution of wealth in the United States is “unjust,” 71 percent of Americans feel more “admiration” than “resentment” toward the rich, 69 percent agree that billionaires “earned their wealth by creating value for others,” 75 percent disagree that “it’s immoral for society to allow people to become billionaires,” 62 percent disagree that billionaires are a threat to democracy, and 62 percent oppose redistributing wealth from the rich to the poor.

This article appears as “The Wealth-Tax Trap ” in the October 14, 2019, print edition of National Review.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

In This Issue


Books, Arts & Manners


Most Popular

White House

More Evidence the Guardrails Are Gone

At the end of last month, just as the news of the Ukraine scandal started dominating the news cycle, I argued that we're seeing evidence that the guardrails that staff had placed around Donald Trump's worst instincts were in the process of breaking down. When Trump's staff was at its best, it was possible to draw ... Read More
Politics & Policy

Elizabeth Warren Is Not Honest

If you want to run for office, political consultants will hammer away at one point: Tell stories. People respond to stories. We’ve been a story-telling species since our fur-clad ancestors gathered around campfires. Don’t cite statistics. No one can remember statistics. Make it human. Make it relatable. ... Read More
National Review


Today is my last day at National Review. It's an incredibly bittersweet moment. While I've only worked full-time since May, 2015, I've contributed posts and pieces for over fifteen years. NR was the first national platform to publish my work, and now -- thousands of posts and more than a million words later -- I ... Read More
Economy & Business

Andrew Yang, Snake Oil Salesman

Andrew Yang, the tech entrepreneur and gadfly, has definitely cleared the bar for a successful cause candidate. Not only has he exceeded expectations for his polling and fundraising, not only has he developed a cult following, not only has he got people talking about his signature idea, the universal basic ... Read More
White House

The Impeachment Defense That Doesn’t Work

If we’ve learned anything from the last couple of weeks, it’s that the “perfect phone call” defense of Trump and Ukraine doesn’t work. As Andy and I discussed on his podcast this week, the “perfect” defense allows the Democrats to score easy points by establishing that people in the administration ... Read More

Democrats Think They Can Win without You

A  few days ago, Ericka Anderson, an old friend of National Review, popped up in the pages of the New York Times lamenting that “the Democratic presidential field neglects abundant pools of potential Democrat converts, leaving persuadable audiences — like independents and Trump-averse, anti-abortion ... Read More