NEW YORK, NY — With states like New Jersey adopting a “millionaire’s tax” and Illinois executing a ballot measure proposing a progressive income tax to replace their current flat rate, taxing the wealthy has become a common clarion call to fix everything from income inequality to state budget shortfalls. Although an actual wealth tax (a tax on wealth rather than income), like that proposed by Senators Bernie Sanders and Elizabeth Warren on the Presidential primary campaign trail, isn’t on the current national or local agenda, it is a topic which will undoubtedly rise to the top again. In California, for example, a wealth tax bill made waves this summer before failing to advance in the legislature. But it may be heard in the next session.
Proponents of taxing the wealth of the richest citizens argue that it is the least harmful solution to inequality and budget deficits and that extreme wealth disparities harm economic growth. According to many, the rich use their wealth to rig the political system, so democracy requires leveling the playing field.
Manhattan Institute senior fellows Allison Schrager and Beth Akers have studied the effects of wealth tax programs and have compiled their observations in a new report, Issues 2020: What’s Wrong with the Wealth Tax.
Schrager and Akers, both economists, agree that wealth inequality is indeed increasing, the country does need more tax revenue, and special interests can get government favors. But none of these reasons justifies a wealth tax, which could damage the economy while raising little revenue. Instead, a better solution for raising additional revenue would be to remove the many existing distortions in the tax system.
Their findings show:
- A wealth tax creates an incentive for entrepreneurs (who make up 67% of the Forbes 400 list) not to take their companies public, keeping the American public from sharing in the growth of the most productive firms and reducing wealth creation within the broader economy.
- Wealth is difficult to measure. Privately held companies are not traded in public markets so there are no stock prices to objectively gauge their value. Also, financial assets can be hidden or moved abroad or converted into other assets that are hard to value.
- A dozen European countries had a wealth tax in 1990, but most abandoned them because they were ineffective and expensive to administer. Today, only Switzerland, Norway, Belgium, and Spain still have wealth taxes.
- Wealth taxes reduce the return to investing and discourages saving. This can reduce growth because investing and capital accumulation are critical to innovation.
For all the effort involved in levying a wealth tax, Schrager and Akers argue that it not only would fail to effectively raise new revenue, but would deliver a devastating blow to domestic growth and prosperity.
About Issues 2020
The Issues 2020 series applies the Manhattan Institute’s breadth and depth of expertise on major issues of national public policy to the key arguments and proposals of the 2020 presidential campaign. MI scholars identify where the central claims driving key debates reflect fundamental misunderstandings about what is happening in America. With succinct explanations of what the data show, they provide a much-needed corrective and a solid foundation for political debates about the nation’s future. Click here to read more.