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Updated on Friday, March 15, 2019
With the 2020 presidential race well underway, Democratic candidates and policymakers have begun present their ideas on how to remedy what they perceive is a tax code that favors America’s wealthiest citizens. Taxing the uber-rich has long been an initiative supported by progressives, and it was amplified in the wake of last year’s sweeping tax reform, which cut taxes for the wealthy and corporations alike.
Some plans have come in the form of structured formal policy proposals (see Elizabeth Warren’s Ultra-Millionaire Tax) drafted with the help of economics professors, while others have made headlines based on comments in nationally-televised interviews (a la Alexandria Ocasio-Cortez’s 70% income tax idea). If Democrats can pull off a win in 2020, these early proposals could offer insight into what might be in store for the tax code.
All of the jargon and acronyms surrounding the subject of new taxes can obscure exactly what presidential hopefuls and pundits are proposing. Check out the table below to understand the basics of what’s currently being discussed, as well as ideas that were under consideration in the not-too-distant past.
|Ultra-Millionaire Tax||70% Income Tax||For the 99.8% Act||Paying a Fair Share Act of 2012|
|Championed by: Sen. Elizabeth Warren||Championed by: Rep. Alexandria Ocasio-Cortez||Championed by: Sen. Bernie Sanders||Championed by: Sen. Sheldon Whitehouse, Warren Buffett and President Barack Obama|
|Details: This would tax a household's net-worth between $50 million and $1 billion at 2% every year, and any net worth over $1 billion at an additional 1%.||Details: Any income earned over $10 million would be taxed as much as 70%.||Details: This bill introduces a progressive taxation structure to the estate tax, starting with estates valued at $3.5 million — much lower than the current $11.4 million.||Details: A piece of legislation inspired by the so-called “Buffett Rule” and supported by President Obama, this act would ensure anyone earning more than $1 million would have to pay a minimum tax rate of 30%.|
|Status: This is only a policy proposal by the Warren campaign and hasn't been taken up by the Senate.||Status: There's been no official policy proposal from Rep. Ocasio-Cortez.||Status: No vote has been taken on this piece of legislation.||Status: The bill was introduced in the Senate in March 2012, but failed to proceed. It has been reintroduced several times, as recently as 2017, but has not been enacted.|
It’s clear that while there are many ways of skinning a cat, the basic differences between the proposals lie in what exactly is being taxed. Most Americans probably understand the basic definition of an income tax, but things get more complex when discussing taxation of net worth and wealth.
How to tax the rich: Net worth, estates or income?
When experts and politicians discuss a wealth tax, they almost always mean a tax on net worth. If you own a business and private assets worth a total of $100 million, but you also carry $75 million in liabilities (such as debt), then your net worth — aka your wealth — is $25 million.
What makes a potential wealth tax, like the one Sen. Warren has proposed, so unusual is that it targets the passive wealth of an individual. Most taxes levied in America involve some sort of transaction — whether it’s a tax on the income you earn from a job, a sales tax you pay at a point of sale, a capital gains tax on a stock sold, or even an inheritance tax you pay when you take possession of an estate. With a wealth tax, no transaction need happen for the tax to be levied. There’s no hiding from the IRS — they’ll be coming for that collection of Van Goghs, whether you sell them or not.
Simply put, wealth is any asset an individual possesses that has monetary value. Some examples include:
- Property, like a house or land
- Bank accounts
- Any businesses owned
- Stocks and bonds
- Private assets, such as art, a Lamborghini collection, diamonds, etc.
Bernie Sanders’ proposal would tax the wealthy on their estates. Estates worth between $3.5 million and $10 million would be taxed at 45% of the estate’s value, with the tax climbing as the value of the estate grows, reaching a peak of 77% of any estate worth $1 billion or more.
To demonstrate how much money his bill would raise, Sanders assumes the net worth of Jeff Bezos at $131.9 billion and claims the Amazon CEO would have a maximum tax liability of $101.3 billion on his estate under his legislation — almost $49 billion more than Bezos would owe under the current law.
Who would have to pay a new wealth tax?
It’s impossible to predict what a hypothetical wealth tax would actually look like after surviving the legislative process needed to make the new tax law.
“In terms of what’s taxed, it’s whatever Congress wants,” said Howard Gleckman, senior fellow at the Tax Policy Center, a nonpartisan think tank based in Washington, D.C.
Even with the candidate proposals out now, there’s no certainty that their campaign proposals would actual survive a battle in Congress. Hypothetically, however, the wealth tax championed by Sen. Warren would apply to individuals with a net worth of $50 million (with an additional tax for those with a net worth of $1 billion and more). If her “Ultra-Millionaire Tax” passed as currently proposed, the results would be:
- a 2% annual tax on household net wealth between $50 million and $1 billion
- an additional 1% annual tax on household net wealth greater than $1 billion
An analysis of Sen. Warren’s wealth tax by Emmanuel Saez and Gabriel Zucman, both economics professors at the University of California, Berkeley, estimates it would directly affect only 75,000 households and raise $2.75 trillion over the course of 10 years.
What are the arguments for a wealth tax?
With Democratic leaders advancing ambitious and expensive new policy programs, from the New Green Deal to a national single-payer healthcare system, a wealth tax on America’s richest citizens is seen by some as necessary to raise the revenue needed to fund these sweeping initiatives.
Sen. Warren, for instance, recently unveiled a plan to help provide child care and early education for every American family. The Universal Child Care and Early Learning Act would guarantee “that every family, regardless of their income or employment, can access high-quality, affordable child care options for their children from birth to school entry” and would cost the federal government $70 billion every year, according to an analysis by Moody’s Analytics. The senator’s document states the revenue raised by her proposed wealth tax would more than cover the cost of universal child care.
Rep. Ocasio-Cortez also swings for the fences with the New Green Deal resolution she introduced to Congress, which tasks the federal government with “eliminating pollution and greenhouse gas emissions as much as technologically feasible” and “meeting 100 percent of the power demand in the United States through clean, renewable and zero-emission energy sources,” among other things. When asked about the practicalities of meeting these goals in an interview on 60 Minutes, the freshman congresswoman stated that “people are going to have to start paying their fair share in taxes.”
What are the arguments against a wealth tax?
Assessment and enforcement. One of the biggest concerns critics have of a possible wealth tax is how it can be assessed and enforced. Determining the wealth of the individual isn’t as easy as asking Alexa “How rich is Jeff Bezos?” and then sending him a bill. The IRS will have to dedicate significant resources to evaluating the value of a taxpayer’s private assets and businesses owned, a challenge Sen. Warren’s online explanation of her wealth tax proposes solving with the tightening of loopholes in the current tax code and increasing the IRS’s enforcement budget. The proposed tax also includes a one-time 40% tax on wealth above $50 million of any citizen renouncing their citizenship to flee to more tax-friendly countries.
But that kind of bureaucratic expansion runs counter to how policymakers have traditionally viewed the role of the IRS. According to Gleckman, for decades, “all of the pressure has been on reducing IRS staff and limiting its ability to do audits.”
“What’s striking about it,” he continued, “is it doesn’t seem to matter whether the Democrats are in charge or the Republicans — there’s very few politicians who are ever interested in giving more resources to the IRS.”
A drain on the job creators. Another argument that some wealth tax advance skeptics have is that wildly successful entrepreneurs won’t want to invest in their businesses (which would be considered as part of their wealth) and the economy would lose out on the new jobs that investment would create.
“The job creator argument is not entirely specious,” said Gleckman. “You have created, at least on the margin, a modest disincentive for very wealthy Americans to invest [in their businesses] and maybe created an incentive for them to invest outside of the United States.”