WASHINGTON — Massachusetts Senator Elizabeth Warren, the Democratic candidate for President, has proposed the passage of a wealth tax. The tax would be 2% annually on net worth between $50 and $100 million, and 3% on net worth above $1 billion. This is a disastrous proposal for America. The proposed Warren tax on wealth is unfair, counter-productive, growth-killing and downright un-American.
Warren says that income inequality has worsened. She claims the gap between the richest Americans and the average Americans is widening. Warren points out that it is simply not fair that a few people have so much, while many people have so little. To correct this, she wants to impose a wealth tax, which, coupled with social programs, would re-distribute income
The Warren tax means families that have worked years, perhaps decades, to accumulate wealth, will be forced to pay millions in extra taxes each year. Their extra earned income is already taxed at 37%. Worse, their capital gains are taxed at 20%. Even after paying those taxes, Warren wants an additional wealth tax of at least $1 million and as much as $50 million annually, simply because the income-earner is wealthy.
Does a recent study support Warren’s wealth tax?
Warren’s proposal received more scrutiny when a recently released study examined the tax rate of the 400 highest income earners. The authors noted that for the first time in history when considering total taxes paid to all levels of government, the 400 highest income earners paid a lower tax rate than the average middle-class income earner.
Many Americans apparently think that is blatantly unfair. The highest income earners should pay a higher rate tax than average Americans, most reasoned. That explains our “progressive” tax system, which allegedly ensures that the tax rate increases as income increases.
The middle class does pay a slightly higher rate than the top 400 income earners only when all government tax liability is considered. That includes all federal, state and local taxes. The reason? Most state income tax rates are progressive. But the social security tax, property taxes and sales taxes are regressive. That means the tax rate actually declines as income increases.
If we consider just the federal income tax, then the top 400 do pay a higher rate than the middle class.
Facts and figures
According to the IRS, in 2014, the 400 top income earners each paid an average of $80 million in federal income tax on an average income of $317 million. Middle-class income earners with the median income of $65,000, paid a total of $16,000 in federal income taxes.
Granted, the high-income earner did very well. But what did high earners receive for the $80 million they paid in taxes? Regardless of income earned, should each of these highly successful people need to pay $80 million per year in taxes?
Warren wants them to pay millions more.
Not only is Warren’s wealth tax proposal blatantly unfair. It is counter-productive. That’s because a wealth tax would reduce capital formation and tend to stagnant the economy. The very simple reason? Higher-income earners primarily supply new capital to the US economy. By raising their taxes, the government diminishes that supply of capital.
Our modern, capital-intensive economy needs new capital for our manufacturing sector and even our service sectors to grow. More capital means more growth. Less capital means less growth.
Less growth also means greater income inequality. As we saw during the economic stagnation from 2008 to 2016, the slow growth invironment provided an opportunity for higher-income earners. But at the same time, those at the lower end saw few opportunities and endured stagnant incomes. Income inequality worsened.
Economic expansion reduces income inequality
Income inequality lessens as the economy expands. We could rapidly reduce income inequality if the country could actually return to true prosperity. That means growth needs to exceed 4% annually. We haven’t experienced annual growth exceeding 4% since 2000.
Growth averaged 4 ½% annually from 1997 to 2000. The reason was simple. Congress enacted just the opposite of a wealth tax. That is, Congress reduced the capital gains tax rate from 28% to 20%. This primarily benefited the capital creating, high-income earners, at least initially.
But the low tax rate encouraged increases in investment, which then spurred high economic growth. Investment and total economic activity increased so much that the tax revenue from capital gains tax actually increased after Congress cut the tax rate. Why? Simply because 20% of $1,500 (or $300) is larger than 28% of $1,000 (or $280).
In addition, President Clinton in his 1996 State of the Union speech declared that the “era of big government is over.” He then worked with Congress to not only balance the budget but generate a budget surplus. That led to prosperity from 1997 to 2000.
The Warren wealth tax
Warren’s wealth tax and the corresponding huge increase in government spending to pay for her social programs, like Medicare for all, is the exact opposite of what President Bill Clinton did. Clinton’s policies led to prosperity. The Warren tax policies will lead to economic stagnation.
Worse yet, Warren’s wealth tax and her big government solutions are un-American. Recall that America traveled from its rocky birth to become the largest most prosperous economy in the world in about 150 years. That’s because we followed four basic principles. We encouraged individual freedom, individual responsibility, low rates of taxation and a limited role for government.
Warren’s wealth tax is opposite to those principles. Warren’s wealth tax is unfair, counter-productive, growth killing and just plain un-American.
— Headline image: Cartoon by Branco. Reproduced with permission and by arrangement with Comically Incorrect.