Written by: Michael DeLeers
Presidential hopeful Elizabeth Warren has been making waves in the media lately with her proposal for a wealth tax. Warren’s proposed tax would place a 2% tax on those with assets over $50 million and a 6% tax on those with assets above $1 billion. It is a tax on net wealth, rather than income. She wants to use the revenue to fund new social welfare programs like relieving student debts and universal childcare. Whether or not you agree with a wealth tax, there is no denying that it sparks several interesting questions: Is it constitutional? Is it feasible? How would it impact the U.S. economy? All of these questions are expected considering the changes Warren is calling for. Believe it or not, wealth taxes have been tried before in Western Europe, and although they had varying degrees of success, they offer pertinent examples for U.S. policymakers going forward. By looking at these examples, I will discuss how wealth taxes have affected countries in Western Europe and whether or not a wealth tax could be successfully carried out in the United States.
In 1990, twelve European countries had a wealth tax. The number has since fallen to three: Norway, Spain, and Switzerland. France is one country that only recently got rid of its wealth tax, opting instead for a real estate tax, one similar to U.S. property taxes. Many in France were critical of the wealth tax because it was seen as the driving factor behind the mass departure of over 42,000 millionaires between 2000 and 2012. These same concerns have been voiced towards Warren’s plan. Her plan differs, though, in that it includes an exit tax for U.S. citizens. In other words, if a U.S. citizen chooses to renounce their citizenship, they would be required to pay 40 percent of their wealth in taxes if they are worth more than $50 million.
Moreover, Warren’s plan may differ in terms of which groups are targeted most by the wealth tax. The threshold for the French wealth tax was on individuals with assets above $1.5 million. Such a low threshold, relative to Warren’s tax, constitutes a significant difference and may result in a different outcome than an exodus of millionaires. Economist Gabriel Zucman has noted that the super-wealthy are less mobile in the U.S. than in other countries, in large part because it would require them to renounce their American citizenship. Losing American citizenship would strip leavers of their right to vote and their ability to become an elected official, as well as their children’s ability to gain American citizenship.
Another possible strength of Warren’s plan is its lack of exemptions. France, for instance, had an exemption on individual companies, artwork, and antiques. These items would not go towards your net worth. As a consequence, some have placed their money into exempt assets, in effect lowering their net worth and avoiding the wealth tax. However, some have concerns that the U.S. agricultural sector will be highly exempt from any wealth taxes because many family owned farms have their money invested in land and farm equipment, meaning they do not have the liquid cash to pay taxes. As a result, many billionaires are likely to invest their money in farm lands and equipment, distorting their wealth, and avoiding the tax. Hence, many believe that the wealth tax will be difficult to actually carry out, requiring substantial growth in the IRS, an agency that has had its tax enforcement budget cut 23% in the past eight years. The wealth tax would have a significant logistical burdens from the start. Other countries have realized this difficulty. For instance, in the 1970s the British Labour government pushed for a wealth tax but realized within five years that it would be impossible “to draft one which would yield enough revenue to be worth the administrative cost and political hassle.”
In sum, we can see that the wealth tax proposed by Elizabeth Warren has some fundamental differences when compared to the French and other European wealth taxes. By looking at the failures of different European wealth taxes, Warren may be able to craft a wealth tax that avoids some of the flaws of previous plans. Nonetheless, it is important to note that the ability of the U.S. to enforce a wealth tax, assuming it is constitutional, is highly improbable given the nature of our tax enforcement system and the sectors which will likely be exempt from the tax. Moreover, considering that the wealth tax in Europe raised about .2% of GDP a year on average, or $40 billion, it may be beneficial for Warren to consider other avenues of taxation that may be easier to enforce and produce the large amount of revenue to fund her wide sweeping plans.