Monday, November 4, 2019

Elizabeth Warren's 2% Wealth Tax is Really More Like a 62% Wealth Tax Over Time

"I am only taxing at 2%. Hee, hee."

Tyler Cowen explains:
I am seeing more people argue for a wealth tax, but I have yet to see them address the core issues...

First, let’s say a proponent argues for a “two percent wealth tax.”  In the United States, most of that tax is likely to fall on accumulated capital gains.  I then would like to know what is the implied tax rate on capital gains under such a system.  Hint: you do not just add “two” to the current capital gains rate, since a given capital gain is diminished by two percent each year, not just once.  The final net tax rate will depend on the rate of discount, but since marginal funds seem to be going into negative nominal yield securities, arguably that discount rate should be pretty low, shall we say zero?

I played around with a bunch of numbers, and across 20-30 year periods came up with total net capital gains tax rates in the 50 to 70 percent range, noting that the current 20 percent long-term base rate for high earners is applied to nominal not real gains.

Has any wealthy country sustained such a high net real capital gains rate?

Of course, rhetorically a “2 percent tax on wealth” sounds much better than say “a 62 percent tax rate on long-term capital gains.”  Don’t be fooled!

To be clear, I am not sure I have found the right numerical range.  Nonetheless I view finding the right estimates to be the responsibility of the wealth tax advocates.  I am simply pointing out that the correct numerical range might be quite high


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