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Taxing Wealth Is a Fool’s Errand

Contrary to what you may have read, the Biden administration and Congress want to tax capital income and capital gains, not wealth. That’s the right call.

Dimitrios Kambouris/Getty Images for the Met Museum/Vogue
Alexandria Ocasio-Cortez and Aurora James at the Met Gala in New York City, on September 13

“TAX THE RICH,” blared the red lettering on the back of Representative Alexandria Ocasio-Cortez’s white evening gown at last night’s Met Gala, the word “RICH” lettered impudently across her rump. Yes, but how? The lead story in Tuesday’s New York Timesposted online at very nearly the same moment AOC was épater-ing the preposterously overfunded Anna Wintour Costume Center—would have you believe that taxing the rich isn’t worth a damn unless you tax wealth as opposed to income. “Facing the delicate politics of a narrowly divided Congress,” wrote the Times’ Jonathan Weisman and Jim Tankersley, “senior House Democrats … focused on traditional ways of raising revenue: by raising tax rates on income rather than targeting wealth itself.” The implication was that taxing income is sissy stuff and taxing wealth the real deal.

“The richest of the rich earn little from actual paychecks,” Weisman and Tankersley explained, “so a surtax on income would have little impact. Their vast fortunes in stocks, bonds, real estate, and other assets grow largely untaxed each year.” Well, yes. But that’s a better argument for taxing capital income than it is for taxing wealth. 

Taxing income is difficult to achieve politically but not all that difficult to do. Taxing wealth is almost impossible to achieve politically, and almost impossible to do. Consequently, whenever I hear somebody call for a wealth tax, I assume that the person in question is posturing.

Case in point: Donald Trump. In 1999, Trump heralded his departure from the Republican Party to weigh a presidential candidacy on the Reform Party ticket by proposing a wealth tax. Trump favored a one-time “net worth” tax of 14.25 percent to pay off the national debt. It was “something he feels strongly about,” longtime adviser Roger Stone told the Los Angeles Times, even as Trump conceded his plan would cost him personally “hundreds of millions of dollars.” In fact, Trump was so obviously posturing that his opponents in the 2016 Republican primary scarcely bothered to resurrect the episode. 

“The Finance Committee has proposed,” Weisman and Tankersley write, “a one-time surtax on billionaire’s fortunes.” No, it hasn’t. Senator Elizabeth Warren, who sits on the Finance Committee, and Senator Bernie Sanders, who does not, have proposed a 2 percent annual wealth tax on the net worth of households and trusts valued at $50 million to $1 billion, and a 3 percent annual wealth tax on the net worth of households and trusts whose value exceeds $1 billion. Warren and Sanders are more serious people than Trump (they aren’t posturing), but their wealth tax isn’t a serious proposal. It has not been voted on in committee.

Possibly Weisman and Tankersley were referring to a proposal included in a 2019 paper by Senator Ron Wyden, then ranking member on Finance and now committee chairman. The paper was titled, “Treat Wealth Like Wages,” which made it sound like Wyden advocated wealth taxes, when in fact what Wyden was proposing were various plausible ways to tax rich people’s capital income, which is quite different. Wyden’s paper proposed a one-time tax on built-in gains accrued before those gains become taxable. That was not a wealth tax; it was a capital gains tax. That hasn’t been voted on in committee, either.

All this may sound like hair-splitting. The House Democrats’ tax proposals are in many ways more timid than those proposed by the Senate Finance Committee, most notably in their omission of President Biden’s proposed taxation of unrealized capital gains at death.  

As I’ve noted previously, elimination of the “angel of death loophole” is an excellent policy on which Democrats should not go wobbly. But like Wyden’s proposed tax on built-in gains, it isn’t a wealth tax. It’s a capital gains tax. (Some people consider estate taxes wealth taxes, but I don’t, because when wealth transfers from Person A to Person B, it’s effectively a one-time boost in Person B’s income.)

Why do I make such a fuss about the distinction between taxing capital income on the one hand and taxing wealth on the other? Because it muddies the central problem, which is that taxes on capital and business income have been eviscerated over the past generation to the point where, starting in 2018, the effective tax rate on capital income fell below the effective tax rate on labor income, according to Berkeley economists Emmanuel Saez and Gabriel Zucman. The immediate culprit was Trump’s sharp cut in corporate and estate taxes in 2017, but, as Saez and Zucman demonstrated in their 2019 book, The Triumph of Injustice, for two decades previously, both parties had been whittling away at taxes on capital, starting with President Bill Clinton’s lowering of the top capital gains rate in 1997 from 28 percent to 20 percent. (Biden proposes raising the top capital gains rate to 39.6 percent; the House Democrats propose raising it to a paltry 25 percent.) “Capital income,” Saez and Zucman wrote, “is becoming tax-free.”

That’s a calamity. But fixing it with wealth taxes would be a fool’s errand. For starters, the United States doesn’t have any wealth taxes at the national level, so you’d have to create an entirely new tax. Doing so, as Treasury Secretary Janet Yellen noted in a February New York Times interview, would pose “very difficult implementation problems.”  

Wealth taxes haven’t worked very well in Europe. A 2018 report by the Organization for Economic Cooperation and Development found that the number of OECD countries with wealth taxes dwindled after 1990 from 12 to four because wealth taxes were “more distortive and less equitable” than taxes on capital income and estate taxes. Revenues from wealth taxes in the four countries that kept them were surprisingly low, accounting, in 2016, for 0.5 percent of total revenues in France and Spain and 1.1 and 3.7 percent, respectively, in Norway and Switzerland.

“The main difficulty that European countries have had when they’ve tried to impose this,” William Gale, an economist at the Brookings Institution, explained to me, “is that if you make the exemption small enough, then you start hitting regular people, and if you start exempting certain types of assets like family farms … that induces all sorts of shifting or relabeling to go on.” Warren and Sanders avoid this problem by avoiding exemptions and setting their proposed threshold very high, but valuation is still a mess, Gale said, “for assets that are either intangible, like the value of a business,” or assets that aren’t traded, like art.  

The revival in recent years of interest in wealth taxes derives in large part from Thomas Piketty’s influential 2014 book, Capital in the 21st Century, with its distressing conclusion that 

 r > g

where r is return on capital and is economic growth. That raised the specter of a return to the aristocracy of inherited wealth that dominated most Western societies through the nineteenth century. But in the U.S., most of our largest fortunes are built on income, not wealth. The growth in U.S. wealth inequality over the past three decades has resulted less from Rockefellers and Waltons accruing interest on family capital than from corporate CEOs and financial buccaneers being grossly overcompensated for their labor. Income is still where our economy lives, as it has since the Industrial Revolution mooted farm acreage as the measure of financial well-being.

By all means, tax those Rockefellers and Waltons when they die. But while they live, it’s a lot simpler to tax people’s income. There’s absolutely no reason we can’t tax the wealthier among them a whole lot more, as the Biden administration seeks to do.