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Reason
Reason
Peter Suderman

Wealth Taxes Won't Work

Back in the pre-COVID days of 2019, Sen. Elizabeth Warren (D–Mass.) proposed an annual "wealth tax" of 2 percent on assets for households worth more than $50 million, plus additional surtaxes on households worth $1 billion or more. There were several problems with the idea.

Such a tax would be incredibly difficult to administer, requiring tax authorities to regularly assess and value unusual assets like art collections. It might drive wealthy individuals and households to move their holdings to other countries with more favorable tax policies, as has happened in multiple countries. Most wealthy Western democracies that have experimented with wealth taxes eventually ended them.

Warren pitched her plan as a way to make the "tippy top 0.1% of U.S. households" pay "their fair share," providing revenue to "accelerate badly needed investments in the middle class." But a wealth tax was not a novel way to tax the rich; it was a dodgy policy that had been repeatedly tried and repeatedly failed.

Also, it is probably unconstitutional, since Article I of the Constitution prohibits any "capitation, or other direct, tax," except when taxes are extracted proportionally to the population of a state. It would at minimum invite lengthy court challenges.

Warren's wealth tax didn't make it out of the Democratic primary. President Joe Biden proposed a tax on households with high net worths as part of an early spending proposal, but his more modest plan also went nowhere, even though Democrats controlled the House, the Senate, and the White House.

One might have expected that to be the end of the matter. But in politics, bad ideas never die. What does not fly in D.C. might still have a chance in the states.

As the third year of Biden's presidency began, a coalition of blue states began devising a wealth tax of their own. In January 2023, lawmakers in California, Connecticut, Hawaii, Nevada, New York, Maryland, Illinois, and Washington cooked up a plan to impose a 1 percent tax on "extreme wealth"—a threshold set at $50 million per household—and a 1.5 percent tax on wealth in excess of $1 billion.

That idea, spearheaded by California Assembly Member Alex Lee (D–Palo Alto), faces a legal obstacle in his state, where a constitutional provision caps the tax rate on personal property at 0.4 percent. Lee's proposal pairs the California version with a constitutional amendment that would bypass the cap.

The fact that one of the bluest states in the nation would have to rewrite its constitution to impose the tax raises questions about its wisdom and political viability. Lee nevertheless sounded positively Warrenesque in a press release touting the plan's benefits. "With this modest tax on the ultra-wealthy who pay a lower effective tax rate than the bottom 99%," he said, "we would have sustained investments in our schools, tackle homelessness, maintain and expand needed services, and much more."

Lee assumes that high–net worth individuals would stay in California to pay the tax, which, in addition to the financial burden, would require them to file yearly reports on illiquid assets. Lee insisted that California need not worry about out-migration or capital flight. Between 2011 and 2020, he noted, California ranked "among the lowest of states in terms of residents with incomes above $200,000 leaving in an average year."

That ranking omits the pandemic years of 2021 and 2022, which were marked by migrations of highly paid remote workers from expensive locales to cheaper, lower-tax pastures like Florida and Texas. Furthermore, the upper-income salary earners captured by the numbers that Lee cited may not be representative of the billionaires and high-net-worth households that would be subject to the wealth tax. Marc Joffe, a state policy analyst at the Cato Institute, notes that billionaires often pay so much in taxes that even the loss of a few could depress state tax revenues.

The wealth tax has failed before. Progressive lawmakers will continue trying to make it happen—and likely keep failing.

The post Wealth Taxes Won't Work appeared first on Reason.com.

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