© 2020 Tax Analysts. All rights reserved. Analysts does not claim copyright in any public domain or third party content. ON THE MARGIN tax notes federal High Tax, Low Tax? Comparing Income Tax and Wealth Tax Rates by Erin Melly and Alan D. Viard Without taking a position on the merits of wealth taxation,1 we provide a framework for properly interpreting wealth tax rates and their relationship to income tax rates. Because wealth taxes impose a flow of taxes on a stock of wealth, they cannot be properly stated without specifying a time unit. For example, the top tax rate in the wealth tax proposal by Sen. Elizabeth Warren, D-Mass., is not 6 percent but is instead 6 percent per year. No time units are required for income tax rates, for which a flow of taxes is imposed on a flow of income. We discuss how to translate wealth tax rates into equivalent income tax rates for both safe and Erin Melly is a research associate and Alan D. risky assets. We show that apparently low wealth Viard is a resident scholar at the American tax rates are equivalent to apparently high income Enterprise Institute. They thank Karlyn tax rates and vice versa. Bowman, Alex Brill, Jason Saving, and Michael We critically assess the public and political Strain for helpful comments. discussion of wealth tax rates. We find that the In this article, Melly and Viard clarify the media and the candidates have a mixed record fundamental differences between wealth tax regarding the clarity and accuracy of their rates and income tax rates, and they critique the public discussion of wealth tax rates. descriptions of wealth tax rates. Although taxes on investments can be The views expressed herein are solely the expressed in terms of wealth tax rates or income authors’ and do not necessarily reflect those of tax rates, economists often prefer to express them any other person or institution. in terms of effective tax rates on future spending. Copyright 2019 Erin Melly and Alan D. Viard. We explain the computation and significance of All rights reserved. those tax rates. Although the wealth taxes proposed by two I. Background prominent Democratic presidential candidates On January 24, 2019, Warren proposed an have drawn wide attention, the discussion has not annual wealth tax as part of her campaign for the always made clear that wealth tax rates and 2020 Democratic presidential nomination. Her income tax rates are fundamentally different. proposal featured a tax rate of 2 percent per year on wealth between $50 million and $1 billion, and 1 For a discussion of the advantages and disadvantages of wealth taxes, see Alan D. Viard, “Wealth Taxation: An Overview of the Issues,” in Maintaining the Strength of American Capitalism 180-199 (2019). TAX NOTES FEDERAL, JANUARY 13, 2020 271 For more Tax Notes® Federal content, please visit www.taxnotes.com. ON THE MARGIN © 2020 Tax Analysts. All rights reserved. Analysts does not claim copyright in any public domain or third party content. a rate of 3 percent per year on wealth exceeding $1 sense in principle,” it should not be adopted 2 6 billion. because it has failed in other countries. Sen. Cory On September 24, 2019, Sen. Bernie Sanders, I- Booker, D-N.J., has criticized the wealth tax as cumbersome and hard to evaluate, and has urged Vt., another candidate for the Democratic 7 presidential nomination, also proposed a wealth that revenue be raised through other means. tax. For married couples, the marginal tax rate Michael Bloomberg has said that wealth taxation would be 1 percent per year on wealth between has been tried in other countries and “it just doesn’t work.”8 $32 million and $50 million, 2 percent per year on wealth between $50 million and $250 million, 3 As shown in Figure 1, there has been a percent per year on wealth between $250 million dramatic increase in internet searches for the and $500 million, 4 percent per year on wealth phrase “wealth tax” in the United States since late between $500 million and $1 billion, 5 percent per January 2019. Popularity receded after the first year on wealth between $1 billion and $2.5 billion, two months of 2019, although the term was still 6 percent per year on wealth between $2.5 billion more frequently searched throughout 2019 than and $5 billion, and 8 percent per year on wealth in previous years. Later in the year, there were exceeding $10 billion. The wealth levels for the two additional spikes in internet searches during various brackets would be half as large for the weeks of September 20 and October 13. The unmarried taxpayers.3 increases coincided with the January 24 release of On November 1, 2019, Warren revised her Warren’s plan, the September 24 release of proposal, raising the tax rate on wealth exceeding Sanders’s plan, and the October 15 release of $1 billion to 6 percent per year. The rate increase economists Emmanuel Saez’s and Gabriel 4 was part of her plan to pay for Medicare for All. Zucman’s book, The Triumph of Injustice, which Other Democratic presidential candidates advocates a wealth tax. have expressed various views about wealth We now examine the differences between taxation. Tom Steyer has said that “a wealth tax is wealth tax rates and income tax rates and how a 5 central to any progressive path forward.” South tax rate for either tax can be translated into an Bend, Indiana, Mayor Pete Buttigieg has said, “I’m equivalent rate for the other tax. all for a wealth tax.” Sen. Amy Klobuchar, D- Minn., has said that a wealth tax “could work” II. Understanding Wealth Tax Rates and that she was open to it, but that different ways A. Stocks, Flows, and Time Units to tax the affluent should also be considered. Former Vice President Joe Biden has stated that Wealth tax rates and income tax rates are wealth taxes “demonize wealth” and proposes fundamentally different because of their distinct instead to “raise taxes on the wealthy” by tax bases. increasing the capital gains tax. Andrew Yang has Under an income tax, a flow of taxes is said that, although a wealth tax “makes a lot of imposed on a flow of income. The tax rate therefore need not include a time unit. Under a 20 percent income tax, for example, each month’s tax payment is 20 percent of the month’s income, each year’s tax payment is 20 percent of the year’s 2 Warren release, “Senator Warren Unveils Proposal to Tax Wealth of Ultra-Rich Americans” (Jan. 24, 2019). For previous coverage, see Asha Glover, “Warren Proposes New Tax on Wealthiest Americans,” Tax Notes, Jan. 28, 2019, p. 444. 6 3 The remarks by Buttigieg, Klobuchar, Biden, and Yang were made at Sanders, “Tax on Extreme Wealth” (Sept. 24, 2019). For previous the October 15 Democratic debate. The Fix Team, “The October coverage, see Glover, “Sanders’s Wealth Tax Takes Warren Proposal Democratic Debate Transcript,” The Washington Post, Oct. 16, 2019. Further,” Tax Notes Federal, Sept. 30, 2019, p. 2317. 7 4 Booker made his remarks at the November 20 Democratic debate. Warren, “Ending the Stranglehold of Health Care Costs on The Fix Team, “The November Democratic Debate Transcript,” The American Families” (Nov. 1, 2019). For previous coverage, see Jad Washington Post, Nov. 21, 2019. For previous coverage of the debate, see Chamseddine, “Warren’s Medicare for All Offsets Hit the Rich,” Tax Jonathan Curry, “Debate Foes Attack Viability of Warren’s Wealth Tax,” Notes Federal, Nov. 11, 2019, p. 1025. Tax Notes Federal, Nov. 25, 2019, p. 1366. 5 8 Steyer, “Tom Steyer to Michael Bloomberg: Back a Wealth Tax or Mark Niquette, “Bloomberg Says He Should Pay More Taxes but Drop Out of the 2020 Presidential Race,” USAToday.com, Nov. 25, 2019. Opposes Wealth Levy,” Bloomberg.com, Nov. 26, 2019. 272 TAX NOTES FEDERAL, JANUARY 13, 2020 For more Tax Notes® Federal content, please visit www.taxnotes.com. ON THE MARGIN © 2020 Tax Analysts. All rights reserved. Analysts does not claim copyright in any public domain or third party content. income, and each decade’s tax payment is 20 Under a 6 percent per year wealth tax applied percent of the decade’s income. annually, tax payments per month equal 0.5 Under a wealth tax, in contrast, a flow of taxes percent of wealth, tax payments per year equal 6 is imposed on a stock of wealth. A wealth tax rate percent of wealth, and tax payments per decade therefore cannot be stated correctly unless a time equal 60 percent of wealth. The tax rate can unit is (explicitly or implicitly) specified. A wealth therefore be expressed as 0.5 percent per month, 6 tax rate cannot be simply 6 percent, but it can be 6 percent per year, and 60 percent per decade.11 The percent per year.9 Wealth tax rates require time tax rate is inescapably dependent on the choice of units for the same reason that interest rates, which time unit. describe the flow of income generated by a stock In principle, the wealth tax rate can be of wealth, require time units. For example, an expressed using any time unit. There is no unique interest rate cannot be simply 2.5 percent, but it significance to the interval in which our planet can be 2.5 percent per year.10 revolves around its sun. In practice, however, a year is the most natural time frame to express wealth tax rates, both because the wealth tax would probably be applied annually and because 9 No time units are needed for estate taxes because a single tax payment is imposed on a single stock.