ADVERTISEMENT

Warren Wealth Tax Will Have Little Effect on Inequality, Wealth Tax Pioneer Says

Julian Castro Joins Elizabeth Warren On The Campaign Trail In Iowa
Getty Images
January 20, 2020

Wealth taxes of the sort proposed by Sen. Elizabeth Warren (D., Mass.) will have little impact on economic inequality, one of the pioneers of wealth taxation wrote in a recent paper.

Edward Wolff, an economist at New York University whose 1995 book Top Heavy was one of the first to float the idea of a tax on wealth, argued in a recent paper that Warren's wealth tax would have a "minuscule" effect on wealth inequality. Using data from the Survey of Consumer Finances, Wolff examined the effects of both Warren's tax and a Swiss-style wealth tax, finding that both would have minimal impact on America's Gini coefficient, a standard economic measure of inequality.

"How do the Swiss and Warren wealth tax affect overall wealth inequality? On the basis of the Gini coefficient, there would be virtually no impact from either tax," Wolff wrote. "If one objective of a wealth tax is to substantially reduce wealth inequality, neither of these taxes will achieve that objective."

This finding, in particular from Wolff, challenges the efficacy of a tax which campaigns like Warren's and Sen. Bernie Sanders's (I., Vt.) have framed as a way to close the yawning gap between rich and poor. Although Wolff remains sympathetic to wealth taxation, his findings further illustrate why many European countries have abandoned wealth taxes in favor of other schemes.

Wolff's conclusions rely on an analysis of the impact that Warren's wealth tax would have on the Gini coefficient, a statistical measure of how unequally income or wealth are distributed across society. A Gini coefficient of zero means wealth is perfectly equally distributed, while a coefficient of one means perfect inequality. For income, the United States has a coefficient of 0.39, making it the sixth-most unequal country among the OECD, a group of economically developed nations. Wolff finds that the Gini coefficient for wealth was between 0.87 and 0.88 as of 2016.

According to Wolff's estimate, Warren's wealth tax—using the old tax rates of 2 percent on wealth in excess of $50 million and 3 percent on wealth in excess of $1 billion—would cut U.S. Gini by at most 0.0005. In other words, wealth inequality would be reduced by roughly half a percent under the Warren tax scheme.

The reason for this surprising finding has partially to do with the way Gini is calculated, such that it is less likely to change simply because of a reduction in wealth at the very top end of the income distribution—"it is much more sensitive to changes in the middle of the distribution," Wolff writes. But the change would also be minimal because the actual revenue raised by the wealth tax would be a relatively small percentage of total household wealth. Wolff estimates revenues between $230 and $303 billion, just a fraction of the $2.4 trillion held by the top 400 households alone.

Wolff concludes the paper still seemingly supportive of a wealth tax as part of a more broadly progressive tax system. As he told the New Yorker, "From the point of view of fairness, you want to tax people based on their ability to pay … Income itself doesn't give you a good indicator of ability to pay. Some combination of income and wealth is better." (Wolff did not respond to a request for comment from the Washington Free Beacon for this article.)

Still, his findings raise questions about the ability of a wealth tax to bring about the "big, structural change" that the Warren campaign has promised. Last January, Warren campaign adviser Emannuel Saez claimed that "[t]he Warren wealth tax … could have a significant affect [sic] on wealth concentration in the long run." Saez, along with his University of California, Berkeley colleague Gabriel Zucman, masterminded the wealth tax schemes proposed by both Warren's and Sanders's campaigns, with the explicit goal of reducing what they see as massive income inequality. Wolff's analysis throws cold water on those hopes.

Wolff's findings represent only one year's worth of tax revenue; proponents of the wealth tax may argue that its equalizing effects will compound over years, as billionaires' fortunes are scraped away. But, Wolff told CNBC in November, Warren's tax may also "induce a big capital flight out of this country," as the small number of households actually affected by the tax take their proverbial money and run.

"Who is going to sit around and see their wealth earning nothing or even in negative territory?" Wolff asked. (He favors a smaller tax, which he argues would reduce the incentive to flee.)

Concerns about capital flight—as well as about how easily a wealth tax can be administered, and about its constitutionality—have been a hallmark of critics of the Warren plan. Such concerns, as well as low actual revenues realized, are part of why 11 European countries abolished their wealth taxes between 1996 and 2018.