The Orange County Register ran Jennifer Schubert-Akin’s op-ed on the wealth tax, which will be debated by Art Laffer, Presidential Medal of Freedom award winner, and Emmanuel Saez, UC-Berkeley professor and Elizabeth Warren advisor, at the Campus Liberty Tour event at Pepperdine University on March 12th.
The wealth tax is bankrupt
By Jennifer Schubert-Akin
February 28, 2019
Will a wealth tax propel the Democrats to the White House in the presidential election this fall? Three of the party’s leading presidential primary candidates, Bernie Sanders, Elizabeth Warren, and Pete Buttigieg, are campaigning on the issue. Sen. Warren’s proposal, for instance, calls for a two percent tax per year on households with more than $50 million in assets.
Proponents claim a wealth tax is necessary to reduce income inequality and fund various federal government social programs. According to the Sanders campaign, a wealth tax is needed “to reduce the outrageous level of inequality that exists in America today and to rebuild the disappearing middle class…”
Yet evidence from California and elsewhere suggest a wealth tax would fail to achieve these objectives while reducing economic opportunities for hardworking Americans.
Consider: There is no clear correlation between higher taxes on the rich and less income inequality. California is Exhibit A. The Golden State is one of the most unequal states in the country, yet it also has — by a wide margin — the highest state income tax rate on wealthy earners. New York State, which also has one of the country’s highest top marginal tax rates, is the nation’s most unequal state. In contrast, New Hampshire, Wyoming, and Alaska are three of the most equal states, and they have no state income tax at all.
Nationwide, income inequality has fallen dramatically after President Trump cut taxes on corporations and high earners. Since 2018, the share of net worth held by the bottom 50 percent of households has increased while the portion owned by the top one percent of earners has decreased, reversing a longstanding trend. Net worth owned by the bottom half of households has increased by nearly 50 percent—more than three times faster than the rise for the top one percent of earners.
What explains this apparent contradiction? When governments impose punitive tax rates, they suck productive capital out of the economy. The wealthy don’t just hoard their earnings under a mattress as populists claim. Rather, they use their money to hire new workers, raise employee wages, expand their businesses, make purchases, and invest in other companies and ideas. These funds stimulate the economy and provide the rest of us with the opportunity to live the American dream.
Capital is also mobile and global. Governments that tax it repeatedly or at high levels will chase it offshore just like the U.S. did to roughly three trillion dollars of corporate earnings before the recent tax cuts brought the corporate rate in-line with the developed world average.
European countries such as France, Sweden, Germany, and Denmark found this out the hard way. They scrapped their wealth taxes in recent years after they failed to bring in expected revenue while pushing out taxpayers. According to French economist Eric Pichet, France’s wealth tax cost the country more than $200 billion, roughly twice the revenue it generated, and reduced the country’s GDP growth. One analysis concludes that the wealth tax chased away 10,000 millionaires from France in 2015 alone.
Art Laffer, Presidential Medal of Freedom award winner and former Ronald Reagan advisor, popularized this trade-off between higher tax rates and lower tax revenues with his Laffer Curve. This economic model graphically demonstrates an indirect relationship between tax rates and tax revenues above a certain threshold. Indeed, U.S. tax revenues have grown since tax rates were cut.
Laffer will debate Emmanuel Saez, UC-Berkeley professor and advisor to Sen. Warren, over the effectiveness of a wealth tax at a free public event at Pepperdine University on March 12th. The event is sponsored by The Steamboat Institute and the Pepperdine School of Public Policy.
Aside from these practical objections to a wealth tax, there are also moral implications. A wealth tax amounts to the confiscation of personal property that has already been taxed at least once before. The Fifth Amendment to the Constitution protects people’s “private property” from being “taken for public use without just compensation.” For this reason, the wealth tax is likely unconstitutional.
As recent history demonstrates yet again, the best way to reduce income inequality and help the middle class is a flourishing economy, which a wealth tax threatens. Whether a wealth tax is effective in greasing the path to political power, however, remains to be seen.
Jennifer Schubert-Akin is the chairman and CEO of The Steamboat Institute.