Via Financial Times

The debate over whether the US should impose a federal tax on wealth has gripped US politics after Democratic candidate for president Elizabeth Warren tabled the plan as one of the pillars of her campaign.

Ms Warren has advanced the idea as a way of paying for her healthcare proposals. But the prospect is an uncomfortable one for the country’s billionaires. Microsoft founder Bill Gates last week questioned whether Ms Warren would be willing to sit down with him to discuss the plan — she responded that she would love to explain to him exactly what he might pay. 

Here is what they might discuss. 

What is a wealth tax?

Most of the US federal government’s revenue comes from taxes on income, such as personal salaries and corporate profits. The government also treats returns on investments as income, via a capital gains tax, but there is currently no tax on the principal of those investments — on wealth. 

Individual US states tax homes and commercial property to pay for primary schools and local police departments, and the federal government assesses a tax on estates over $11m. 

A federal wealth tax, however, would hit a household’s complete net worth every year, falling on all assets including homes, portfolios of stocks and bonds, art, land and yachts. 

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How much would Mr Gates pay? 

Ms Warren has proposed what her campaign calls an “ultra-millionaire” tax of 2 per cent on assets above $50m, plus a 1 per cent “billionaire surtax” on assets above $1bn. 

Mr Gates is worth $107bn, according to Forbes. Ms Warren’s campaign says he would pay $6.4bn next year. 

Emmanuel Saez and Gabriel Zucman, economists from the University of California at Berkeley who designed the ultra-millionaire tax, have calculated that if the 3 per cent billionaire surtax had been in place since 1982, Mr Gates would have been worth $36bn last year. 

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Bernie Sanders, another leading candidate for the Democratic nomination, has an even more ambitious plan. It starts at 1 per cent on net worth above $32m, and raises taxes in steps until it arrives at 8 per cent for wealth over $10bn.

The Sanders campaign says that would put Mr Gates’ bill to a Sanders administration at $8.3bn, and that the plan would cut the wealth of billionaires in half over the next 15 years. 

Why tax wealth?

Both candidates point out that wealth inequality is worse in the US than in any other developed country.

Mr Saez and Mr Zucman looked at public records of taxes paid on capital gains, and used them to infer the value of the underlying assets.

They found that the share of household wealth belonging to the richest 0.1 per cent of US families rose to 22 per cent in 2012, from 7 per cent in 1978. The concentration has not changed since then; it is possible that richer families have seen lower returns on wealth, or that middle-class families have been paying down their debt.

Mr Zucman said the trend was the same, regardless of how you measure wealth. “If you look at income tax data, estate tax data, the Forbes ranking, they all paint essentially the same picture,” he said.

Mr Sanders says this alone is worth addressing, describing the last several decades of economic policy as a “massive transfer of wealth” from the bottom to the top. Ms Warren emphasises that “a family’s wealth is also an important measure of how much it has benefited from the economy and its ability to pay taxes”.

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Both candidates have pointed to revenue from their wealth taxes as a way to offset some of their spending plans, including government-run healthcare for all. 

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In a contentious public debate in October, Mr Saez said that wealth created power, which skewed politics. Lawrence Summers, an economist who served as secretary of the Treasury under Bill Clinton, responded that it took only millions to be influential in politics and that Mr Gates had not been able to use his wealth to prevent an antitrust case against Microsoft from the federal government. 

Mr Gates and other billionaires have pointed to their charitable contributions as a better use for their wealth. 

A wealth tax would be levied on the value that an asset has accrued, without waiting for it to be realised. The OECD has argued that this could encourage the wealthy to invest their assets in ways that provide more benefit to the economy, prompting more investment in start-ups and less in summer houses that do not generate returns.

Have other countries tried it? 

They have, and many of them ended the experiment. In 1990 12 OECD countries relied on wealth taxes; by 2017, there were only four. The wealth taxes were expensive to administer and even though household wealth grew, wealth tax revenues did not, suggesting widespread avoidance and evasion.

Saez and Zucman have said that the design of a wealth tax is important. Countries share more data than in the past, and it has become easier to estimate asset values, making evasion more difficult. Social norms also play a role. The wealthy have lost the sense of shame they might have once had about evading taxes, some argue.

“The attitude of people in power matters a lot,” said Mr Saez. “Franklin Roosevelt spent a lot of time on the radio shaming tax dodgers.” 

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Could a wealth tax become law?

The political hurdles are high. Ms Warren must see off rivals who say her progressive policies will fall flat with the wider electorate, and even if she wins the White House she will most likely need a thumping Democratic majority in Congress to see her proposals through.

And then there is the US Constitution. The 16th amendment gives Congress the power to collect taxes on incomes. If a wealth tax is a tax on “imputed income” — the potential returns that people could earn from investing their wealth — then it is protected under the 16th amendment. If not, the body of the Constitution states that “direct taxes shall be apportioned among the states . . . according to their respective numbers”.

It is not at all clear what a direct tax is, said Reed Shuldiner, a professor of tax law at the University of Pennsylvania Law School. As for respective numbers, it is possible to argue that a wealth tax would fall disproportionately on the wealthy states of New York, California and Florida. 

Ms Warren’s campaign says that leading constitutional scholars believe her tax to be constitutional. It would almost certainly be challenged, and brought before a conservative-leaning Supreme Court.