Wealth Taxes

We invited our US panel to express their views on three separate issues related to the wealth tax: first, how difficult it would be to enforce; second, assuming it could be enforced successfully, what would be its likely effects; and third, whether there were realistic alternatives within the existing US tax system. We asked the experts whether they agreed or disagreed with the following statements, and if so how strongly and with what degree of confidence:

(a) Senator Warren’s proposed wealth tax would be much more difficult to enforce than existing federal taxes because of difficulties of valuation and the ways by which the wealthy can under-report their true wealth.

(b) If successfully enforced, Senator Warren’s proposed wealth tax would substantially decrease the share of wealth going to the top 0.1% of wealth-holders after 20 years.

(c) A public policy goal that could be accomplished with a well-enforced wealth tax could be equally accomplished with modifications to existing federal taxes – for example, revising the estate tax and/or capital gains tax.

Enforcement

Of our 42 experts, 39 participated in this survey. On the first statement, only one expressed no opinion; and weighted by each expert’s confidence in their response, 34% strongly agreed, 48% agreed, 9% were uncertain, and 9% disagreed. In other words, a substantial majority of respondents considered the wealth tax to be much more difficult to enforce than existing federal taxes.

Among the short comments that the experts are able to include when they participate in the survey, some pointed to past experiences of the challenges of enforcing a wealth tax. Steven Kaplan at Chicago stated that: ‘Where they have been tried, wealth taxes have not been successful’; and Darrell Duffie at Stanford added: The experience in France is apparently that this is a difficult form of tax to implement’.

Others who agreed with the statement commented on the difficulties of enforcement of wealth taxes compared with other taxes: Christopher Udry at Northwestern said they were: ‘Much more difficult than income taxes. The transition to appropriate reporting and record keeping for a wealth tax difficult but feasible.’ Larry Samuelson at Yale commented: ‘Wealth is notoriously difficult to tax. Enforcement problems are compounded by the distortions induced by legal tax evasion.’ And Anil Kashyap at Chicago pointed to the challenge of valuation: ‘Paintings, private businesses, long held property without obvious comparables in multiple locations – all hard to value’.

Others were a little less skeptical, including two who answered that they were uncertain: Abhijit Banerjee at MIT asked: ‘It will be more difficult to implement, but much more? There will be a one-time investment in learning, closing loopholes’; and Jonathan Levin at Stanford noted: ‘It would be difficult, but other parts of the tax code are also very complex to enforce’. Judith Chevalier at Yale, who agreed with the statement, added: ‘There are challenges. Not clear that they would be greater than for the estate tax.’

Aaron Edlin and Emmanuel Saez at Berkeley, both of whom disagreed with the statement, mentioned ways to make the wealth tax enforceable. Edlin commented on valuation issues: ‘One way to avoid under reporting with some assets is to allow anyone to buy at declared valuations. Another is large penalties’; and Saez referred to the resource requirements of tax collection: ‘enforcement success depends on resources devoted to set up a systematic way to measure wealth: information sharing, norms for valuations etc’.

Impact

On the second statement, three respondents expressed no opinion; and weighted by each expert’s confidence in their response, 19% strongly agreed, 54% agreed, 15% were uncertain, 6% disagreed, and 6% strongly disagreed – so just under three quarters agreeing that a successfully enforced wealth tax would substantially decrease the share of wealth going to the top 0.1% of wealth-holders.

In comments, Darrell Duffie said: ‘Conditional on successful enforcement, a simple calculation shows a substantial impact, assuming the revenues are redistributed naturally’;
Larry Samuelson calculated that ‘If successful, taxation at rates of two or three percent, compounded over twenty years, would significantly diminish the taxed wealth’; and Emmanuel Saez noted that ‘Wealth tax mechanically reduces returns to wealth at the top. Behavioral responses likely to magnify the effect. Effect builds up over time’.

Robert Shimer at Chicago, who agreed with the statement, added that: ‘It would also lead to much of the wealth moving offshore, despite provisions against that’; while Steven Kaplan, who strongly disagreed, argued that: ‘Pre-tax wealth inequality is driven by technology and globalization. Wealth taxes do not change those two forces’.

Respondents who were uncertain about the impact returned to the condition of successful enforcement. Richard Thaler at Chicago commented: ‘I don’t know how we get to “successfully enforced”. We can’t collect the estate tax, why would we be able to enforce this?’

Alternatives

On the third statement, two respondents expressed no opinion; and weighted by each expert’s confidence in their response, 13% strongly agreed, 47% agreed, 13% were uncertain, and 27% disagreed – so just under two thirds suggesting that alternative means could achieve the objectives of a wealth tax.

Among those who agreed or strongly agreed with the statement, Michael Greenstone at Chicago said that: ‘a reform of existing taxes to match wealth tax however would need to do something about the stepping up of cost basis for estate taxes’. Richard Thaler concurred: ‘Yes, the estate tax is a sieve. Start with that? Get rid of step up to begin with’; as did Judith Chevalier: ‘To use only income and capital gains taxes, a key policy lever would be eliminating the capital gains basis step up at death’.

Among others who agreed with the statement, Daron Acemoglu at MIT suggested the following: ‘What would be most successful would be a combination of relatively high estate taxes combined with taxes on capital income’. In his comment on the first statement on enforceability, he noted that: ‘Taxing capital income at the same rate as labor income would be simpler, more effective and much less difficult to implement.’

Robert Hall at Stanford said: ‘We should focus on a progressive consumption tax structured as a value-added tax’; while William Nordhaus at Yale proposed: ‘Start with enforcing the current laws. This would be highly progressive move and should be at top of tax agenda, way at top’.

Among those who disagreed with alternative approaches, Emmanuel Saez commented that: ‘Estate and realized capital gains taxes come decades after wealth accumulation => wealth tax is a useful withholding tax back stop’; while Christopher Udry concluded that: ‘Unless the changes in capital gains and inheritance taxes were radical, they can’t match the time path of the wealth tax’.

Evidence

Pete Klenow at Stanford provided links to related research evidence: first, on the impact of US enforcement efforts to tax offshore accounts; second, a model of optimal progressive capital income taxes by Emmanuel Saez; and third, a comparison of the efficiency and distributional effects of wealth taxation and capital income taxation.

All comments made by the experts are in the full survey results.

Romesh Vaitilingam
@econromesh
April 2019