Democratic Presidential hopeful Elizabeth Warren has now surpassed Bernie Sanders in the polls and is garnering a lot of press with a populist message and an economic plan built around a “wealth tax.” According to Warren’s website, her proposed wealth tax would impose a 2% annual tax on taxpayers with wealth in excess of $50 million and purports to raise $187 billion in the first year.
A simple review of Warren’s proposal reveals two basic problems. First, it imposes an effective marriage penalty of up to $1 million per year on married couples with wealth of $100 million. By divorcing (and still living together) a married couple with $100 million of combined wealth could transform into two individual taxpayers each at the $50 million threshold. Incentivizing divorce hardly seems like a favorable public policy position.
Secondly, there’s no exception noted for privately-held businesses. A family owned company worth $60 million would be forced to pay $200,000 each year irrespective of the company’s cash flow, on top of income tax the owners might pay. A business with significant property and equipment or real estate holdings could be put in the position of having to liquidate holdings to pay the tax. Additionally, the owners would be forced to hire an expensive appraisal each year, essentially mandating an additional regulatory burden on business.
Former Clinton Treasury Secretary Larry Summers isn’t a fan of Warren’s proposal. He believes the tax would raise far less than projected - he estimates $25 billion rather than $187 billion. Reasonable people can disagree about what constitutes “fair” tax policy, but nothing in Warren’s proposal seems to make the cut, either from a practical or policy standpoint.