Elizabeth Warren, the senior Democratic senator from Massachusetts and now a candidate for her party’s 2020 presidential nomination, has proposed an annual wealth tax of 2% on households with a net worth of at least $50 million, rising to 3% for households with a net worth of at least $1 billion. Quite a few commentators have questioned whether Warren’s proposed tax would run afoul of the constitutional requirement that any “direct tax” be apportioned among the states on the basis of population. Several leading scholars of constitutional law have signed letters saying that Warren’s wealth tax would not be subject to the apportionment requirement.
I have enormous respect for the scholars who have endorsed Warren’s plan — and for Warren herself, who has helped to spark a serious national conversation about wealth inequality and what to do about it. I also share Warren’s normative prior that the federal government should do much more to ensure a more equitable distribution of wealth. I am less convinced that an annual wealth tax is the way to do it. After a number of exchanges (on and off Twitter) over the last few days, I’ve come to a few (tentative) conclusions that seem worth writing up:
— Warren’s wealth tax, at least insofar as it applies to real property wealth (land and structures), probably would have to be apportioned among the states;
— Contrary to conventional wisdom, apportionment of the real property share of a wealth tax is probably not a deal-breaker;
— As economists have known for some time, we can (nearly) recreate the economic effects of a wealth tax through taxes on asset sales and estates, which would not have to be apportioned among the states;
— One caveat to the previous conclusion is that a wealth tax and a tax on asset sales and estates cease to be near-equivalents if the latter tax is temporary. Unless there is a durable progressive majority in Congress, a tax on asset sales and estates would quite likely be temporary; and
— The potential instability of a tax on asset sales and estates gives rise to a relatively weak argument for an annual wealth tax and a much stronger argument for a one-time wealth tax similar to that proposed by Donald Trump in 1999.
I should make clear that I am not calling for a one-time wealth tax along the lines of Trump’s 1999 proposal. One-time taxes have problems of their own, which I’ll briefly discuss at the end of this post. But a one-time wealth tax a la Trump circa 1999 has considerable advantages over Warren’s plan.
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