Democrats have a game plan for taxing the rich more

New progressive wing of the Democratic party is zooming in on biggest earners in effort to tackle rising inequality

Feb 20, 2019 @ 10:37 am

By Bloomberg News

As U.S. Democrats lay the foundation of their bid to unseat President Donald J. Trump in 2020, raising taxes on the rich is emerging as a central theme for a party being pulled to the left by its invigorated self-described progressive wing. Ideas include a "wealth tax" on assets, much higher income tax rates on the biggest earners and a new tax on financial trades, all in the name of raising more money for new government programs while making a dent in rising inequality.

1. What are the proposals?

Massachusetts Sen. Elizabeth Warren would put a 2% annual tax on household wealth in excess of $50 million. It would be 3% on every dollar above $1 billion.

New York Rep. Alexandria Ocasio-Cortez has floated taxing income above $10 million at 70 percent, up from the current top 37% tax rate that kicks in above $500,000.

(More:When it comes to paying taxes, the rich are different)

Sens. Kirsten Gillibrand of New York and Bernie Sanders of Vermont have backed plans that would largely hit investors, such as a tax on financial trades.

Mr. Sanders would expand the estate tax, applying a rate of as much as 77% on the value of estates above $1 billion. He'd also lower the level at which the tax kicks in to cover estates valued at $3.5 million or above, down from the current $11 million.

Many congressional Democrats, and some Republicans, support requiring investors to pay tax on the gain of derivatives holdings each year instead of waiting until they sell.

New York City Mayor Bill de Blasio is pushing new taxes on mansion purchases and earners of $500,000 or more a year.

2. Who would be hit?

Primarily the richest of the rich — only a fraction of the top 1% of households, in the case of some of these proposals. Warren's tax would hit the wealthiest 75,000 households. A 70% top rate would hit the top 0.01% of earners, according to IRS data, and even then, some people who have most of their income tied to the capital gains from investments could escape the higher rate. Sanders says his estate tax would apply to the wealthiest 0.2% of Americans. Financial transactions taxes would fall most heavily on high-frequency traders, while annual taxes on derivatives, a proposal known as mark to market, would hit investors, including hedge funds, but some plans limit the tax hit for pension funds, insurance contracts and college endowments.

3. How much would such taxes raise?

Warren's would raise $2.75 trillion over a decade, according to University of California-Berkeley economists Emmanuel Saez and Gabriel Zucman, two experts on inequality who helped prepare her plan. That's a significant sum for a tax proposal — nearly enough to pay for Mr. Trump's $1.5 trillion tax cut twice. By one count, the 70% tax could raise $353 billion over a decade; others say that depending how it's designed, it could raise as little as $51.4 billion because of the tax maneuvering it would trigger. It's estimated that a financial-transaction tax set at 0.1% of the value of a securities trade would raise $777 billion over a decade, while an annual tax on derivatives would generate $18.7 billion in a 10-year period.

4. What would wealth taxes do for inequality?

That's hotly debated. Targeting what people have, rather than what they earn, is generally seen as a more potent way to redistribute wealth, because wealth inequality is greater than income inequality. Some new research also suggests that raising tax rates wouldn't reduce inequality much, because much of the wealth among the richest Americans stems from private business profit taxed at lower rates and from assets that have grown in value but go un-taxed until they are sold.

(More: Should we treat the super-rich as our piggy bank?)

5. What's the argument for raising taxes on the rich?

Democrats argue — and polling suggests an increasing number of voters agree — that the government should use the tax code to redistribute wealth downward. Since the Republican tax cuts passed in 2017 gave the highest income taxpayers a larger proportion of reductions, they say the first order of business is to reverse that trend. They also favor increasing overall tax revenues to pay for an ambitious agenda on health care, higher education and action to limit climate change. Warren has proposed using the proceeds from her wealth tax to pay for a universal child-care plan that would limit American families' expenses to 7% of income regardless of how many children they have.

6. What do opponents say?

That it would be an administrative nightmare to require taxpayers or the IRS to calculate annually the value of assets, including real estate and investments in private businesses that are notoriously hard to assess. Also that taxes on financial trades make capital more expensive for companies, meaning they'll raise less of it. Such a tax could also reduce liquidity in markets, opponents say. More broadly, they say, high taxes on income and on accumulated wealth would discourage innovation and investment.

(More:Why muni bond dealers welcome the tax-the-rich push)

7. Is this a U.S.-only thing?

Many European nations have experimented with a wealth tax of some form, with support ebbing and flowing throughout the decades. Thomas Piketty's 2014 book "Capital in the Twenty-First Century" re-invigorated the debate particularly in European countries with high debt loads, which have eyed wealth taxes as ways to replenish their treasuries. Spain effectively abolished its wealth tax in 2008 but brought it back in 2011, and efforts are again under way to repeal it. French President Emmanuel Macron rolled back his country's "solidarity" tax to apply only to property. After weeks of protests about fuel tax rates and inequality, the French government mulled the idea of expanding the tax to investments. Neither Germany nor the U.K. has a wealth tax, but there's debate within both countries about creating one.

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