Elizabeth Warren has again proposed a federal wealth tax.
The reality that the Supreme Court could declare a federal wealth tax to be unconstitutional is apparently irrelevant to Senator Warren. The possibility of a deep negative economic consequence to the United States as the result of a wealth tax is apparently irrelevant to Senator Warren. The probability that the stock market would be slaughtered by wealthy investors all simultaneously selling stocks and bonds is apparently irrelevant to Senator Warren. The probability that the only buyers of stocks and bonds after a wealth tax would be foreign governments is apparently irrelevant to Senator Warren.
For a wealth tax to be constitutional, two of the six conservative Supreme Court judges and all three of the liberal judges would be required to determine that a wealth tax is not a direct tax. These Supreme Court judges would need to conclude that more than a century of precedent need be obviated. These justices would need to conclude (a) that the 125 year old Pollak decision was incorrect, (b) Supreme Court Chief Justice Roberts was incorrect in what he wrote in NFIB v Sebelius in 2012 and (c) that most of the Supreme Court tax decisions over the past 100 years requiring what is referred to as a recognition event for income to be taxable are all moot. This is a tall order for a Court that reveres stare decisis, the legal principle of determining points in litigation according to precedent.
While there are progressive lawyers and progressive academics who insist that a wealth tax would be constitutional and that the Supreme Court would provide its stamp of approval, there are equally qualified lawyers and academics who believe that a wealth tax would not be constitutional.
Why Senator Warren is not pursuing a wealth tax as a constitutional amendment is a question she has not addressed. Likely, this is because she does not believe the country would support a constitutional amendment to impose a wealth tax. There should be a message in that line of reasoning.
If there is only a 20 percent chance that Senator Warren’s tax plan would be unconstitutional, implementation of a federal wealth tax and creation of programs that would be supported by the wealth tax would be a fool’s errand. (This author believes there is a near 100 percent chance that the current Supreme Court would find a national wealth tax to be unconstitutional.) Congress could not in good conscious implement any continuing new programs after passage of a wealth tax, lest the funds no longer be available in year three or four after a negative decision by the Supreme Court.
If the Supreme Court ruled against Senator Warren’s wealth tax, the Treasury would be forced to return every wealth tax dollar previously collected (with interest) along with eliminating every new program funded with the wealth tax unless other taxes were raised significantly.
Senator Warren’s wealth tax provides for a 2 percent tax on net assets between $50 million and $1 billion and a 3% tax on net assets above $1 billion. Her projections show that $252 billion in federal taxes would be raised in year one. She is wrong by a factor of about 100 percent.
A wealth tax would be accompanied by the sale of assets by taxpayers in order to raise the capital to pay the wealth tax. Should the Senator’s wealth estimations hold true, along with her proposed increase in capital gains taxes, the combination of her new wealth tax accompanied by her new capital gains tax be a tax of 4% to $1 billion and 6 percent for and remaining assets. This would put the total wealth and income taxes raised by Senator Warren’s wealth tax to $500 billion per year.
Nothing Elizabeth Warren can pass in Congress will change the underlying basics of supply and demand. The estimates being made with respect to the funds that would be raised from a wealth tax are wildly optimistic. There would appear to be an assumption that the sale of $500 billion of assets every year to pay the wealth tax along with the necessary income taxes would not be accompanied by a reduction in the price of the assets to be sold.
It is axiomatic that the value of investment assets would decline dramatically if an annual wealth tax was imposed on the wealthy. New investment would decline if not cease. When everyone is a seller, prices go down. Faced with a ten-year $5 trillion tax bill over ten years, the wealthy would not be buying stocks and the value of pension plans would collapse along with the revenues collected.
As pointed out by the Tax Foundation, the only possible buyers would be foreign governments who would be purchasing at bargain basement prices. Who would think that selling America to foreign nations is a great way to move forward toward the middle of this century?
The more famous quote is that a rising tide raises all ships. Senator Warren’s wealth tax would create the reverse which is equally true: A falling tide lowers all ships.