Eakinomics: Wealth
Taxes and Workers
Friday AAF published an analysis of the proposed wealth
taxes by Senators and presidential candidates Bernie Sanders and
Elizabeth Warren, written by Gordon Gray and me. The taxes have similar
structures, with increasing tax rates on wealth topping out at 8 percent
(Sanders) and 6 percent (Warren).
The economic impact of these taxes is of interest because they constitute
a reduction in the supply of capital, and as a result will reduce investment
and innovation, lower productivity growth, and therefore reduce
wage growth. Thus, while affluent households will send in the tax checks,
these responses shift, at least in part, the effective burden of the
taxes to the average worker.
Our estimates indicate that this shift is potentially quite large. In our
base case, labor income falls by $1.6 trillion (Sanders) and $1.2
trillion (Warren) over the first ten years. Over the long haul, workers
end up losing $0.63 for every $1 of wealth taxes collected.
In response, several questions have been raised:
- How can a tax on a
relative handful of individuals have such a large economic
impact?
The key is that these individuals are targeted precisely because they own
a disproportionate fraction of the investible capital in the economy.
What matters is how much economic activity is taxed, not how many people
are taxed. Also, the annual tax rates are quite draconian. If the rate of
return on wealth is 8 percent (how many of you can find
something with an 8 percent return these days?), the Sanders top tax is
an effective rate of 100 percent on the return to capital. Draconian
taxes on the return to a lot of capital have a big impact.
- Doesn’t this ignore the
economic benefits of the programs the wealth taxes fund?
Our base case assumes the wealth tax revenue is handed back to households
as transfer income (e.g., Social Security checks). In alternative
scenarios we assume that the revenue is spent on a high-productivity
government activity. The overall impact of the tax plus spend
package is less negative, but that doesn’t tell you
anything about the wealth tax. It merely says that if the government has
such productive opportunities, it makes more sense to finance them in a
less destructive fashion.
- Doesn’t the transfer
income outweigh the lost labor income, leaving households better
off?
No. It works at first, but as the damage to investment, productivity, and
real wage growth accumulates there is not enough transfer income to keep
overall consumption from falling.
Even in the face of these findings, one might still argue that social
justice demands that the wealth of the affluent be taxed. But it is a
strange theory that argues the right way to make society better is to
make everybody poorer.
|
No comments:
Post a Comment