What We Talk About When We Talk About Wealth (and Wealth Taxes)

The Warren wealth tax case. In late January 2019, Senator Elizabeth Warren, a declared candidate in the U.S. 2020 Democratic primaries, came out with a proposal for the introduction of a progressive federal wealth tax in the United States. This tax - which would be the first of its kind to ever be introduced in the country if this proposal were to be adopted - would apply with a rate of 2% on fortunes valued between $50 million and $1 billion, and 3% on fortunes above $3 billion. Crucially, this tax would apply to all assets, without exemptions; and the proposal includes dissuasive sanctions in case of misreporting of the wealth held abroad by individuals or governments alike. This proposal was publicly endorsed by constitutional scholars as well as by economists such as Emmanuel Saez and Gabriel Zucman. The latter published an official letter in which they argue that a tax on the super wealthy could yield substantial revenue, and would weigh overwhelmingly on the richest households.[1] They proceed to estimate that such a tax could raise as much as 1% of GDP (which is equivalent to the current net wealth tax-to-GDP ratio in Switzerland) making for a potential to significantly curb wealth inequality. Senator Warren’s proposal resulted in debates across the U.S. political spectrum - on both constitutional and economic grounds - and in much confusion on the part of the general public.


What are wealth taxes, and why are they so politically controversial? In order to shed some light on this debate, it may be constructive here to take a step back - and, to (somewhat poorly) paraphrase Raymond Carver, to reflect on what it is that we talk about when we talk about wealth and wealth taxes. As Jacob pointed out in last month’s WealthBlog focusing on wealth surveys, there are a number of ways in which individual wealth can be measured and conceptualized. Another useful way to think about the different types of wealth may be to look at the various ways in which it is taxed. Very broadly, we tend to distinguish between taxes on wealth stocks - which include net wealth taxes (i.e. recurrent taxes on individual net wealth stocks), recurrent taxes on immovable property (local property taxes for instance), and non-recurrent taxes on property (e.g. sporadic capital levies) - and taxes on wealth flows - which consist of inheritance and gift taxes, estate transfer taxes, and taxes on financial and capital transactions. For centuries, real estate has constituted the most important element of the base of wealth taxes, which have always been an especially political aspect of tax policy. Existing reviews on the history of wealth taxation in developed countries (see for instance Kessler & Pestieau [2] and Bird [3]) show that in spite of diverging trajectories across OECD countries, a common trait is that wealth taxes never were a major source of government revenue. Still, wealth in the form of immovable property and inheritance was quite consistently taxed in some way in most developed countries based on fairness considerations - beyond revenue needs. Strikingly, the importance of wealth taxes has declined considerably in the past couple of decades - even though the stock of wealth, capital income and inequality in these countries has increased. As an illustration, currently, only 4 OECD countries have net wealth taxes against 12 in 1990.[4]


The politics of wealth taxation. Perhaps even more so than income taxation, the taxation of wealth remains a “highly political area of tax policy” (Bird), and the fate of wealth taxation is often determined by political forces. The “against” side can be roughly split into two sets of arguments. The first contends that wealth taxation is bad - because it may disincentivize savings and capital formation as well as entrepreneurship, because of the risk of “double taxation” [5], and because it may discourage top talent migration. The second argues that it is hard to tax wealth - because many assets are illiquid and hard to value, because of the avoidance (through shifting) and tax evasion (through fiscal expatriation or tax havens) issues, and also because of the widespread negative perceptions of wealth taxation among citizens, which generate strong political and social resistance against it. The side “in favour” of wealth taxation, on the other hand, underlines both the revenue potential from wealth taxation, which could help reduce public debt and fund social spending; and the equity and meritocratic rationale to tax wealth in addition to income. Crucially, some argue that a well-designed and properly enforced wealth tax could significantly reduce wealth inequality across and within generations - since, as Gabriel Zucman and Emmanuel Saez put it, “if very rich people have to pay a percentage of their wealth in taxes each year, it makes it harder for them to maintain their wealth”.[6] The intuition here is quite straightforward. A complication, nonetheless, is that there is very little consensus even among economists regarding the effects of wealth taxation on either efficiency or equity dimensions. At a time when the reduction of inequalities has been placed at the center of most national agendas, politicians have to deal with increased demands for social fairness combined with a deeply rooted and persisting skepticism toward the taxation of wealth. In many cases - and one can think here of the highly controversial repeal of the “Impôt de Solidarité sur la Fortune” in France in addition to the Warren case - the taxation of wealth crystalizes tensions and attention to the point where it becomes too much of a political gamble for wary politicians to explicitly engage with. Insofar as the public discourse held around the issues of inequality and wealth taxation largely participates in shaping individuals’ perceptions of and opinion on both matters, increased dialogue between academics and politicians could be fruitful to get a majority of individuals to converge not on whether or not we should tax wealth per se, but on what we talk about when we talk about this.


[1] For a more detailed analysis of the Warren proposal, see this working paper by Saez & Zucman.

[2] Kessler, D. and P. Pestieau (1991). The Taxation of Wealth in the EEC: Facts and Trends. Canadian Public

Policy / Analyse de Politiques 17(3), 309–321.

[3] Bird, R. M. (1991). The Taxation of Personal Wealth in International Perspective. Canadian Public Policy / Analyse de Politiques 17(3), 322–334.

[4] Including Austria (1994), Denmark and Germany (1997), the Netherlands (2001), Finland, Iceland and Luxembourg (2006), Sweden (2007), and France (2017).

[5] For instance, if some assets have already been taxed as income, or are liable to taxation in another jurisdiction.

[6] See footnote 1.