The Basic Case for a Wealth Tax

Bob Lord & Lee Price

Changes in tax policy since 1980 have been driving U.S. inequality to levels not seen since the original Gilded Age. Reversing that trajectory — and restoring a more egalitarian society — will require a complete overhaul of the changes in tax policy we’ve seen over the past four decades.

Taxes as a share of national income have now been remarkably stable for 40 years. Total federal tax revenue last year stood at 17 percent, about the average for the last half-century. Income taxes, meanwhile, have stayed steady at 8 percent of the economy.

These stable percentages should be a cause for alarm, not satisfaction. In any tax system based on progressive tax principles, federal income tax revenue should increase as a greater share of income goes to people in the higher tax brackets. But that hasn’t happened. The big tax cuts that Ronald Reagan, George W. Bush, and Donald Trump have signed into law have tilted our tax structure in favor of those at the top.

Thanks to these cuts, our wealthy have spent the last four decades paying taxes at significantly lower rates. The taxes they pay have dropped so much that total federal revenues have remained stable only because average Americans are paying, as a share of the economy, far more in regressive payroll taxes.

Some numbers: Between 1980 and 2018, tax law changes favoring the nation’s rich left our billionaires paying 79 percent less in taxes, as measured as a share of their wealth. The country’s top .01 percent, a group consisting of households with wealth in excess of $100 million, have seen their tax payments as a share of their wealth drop by almost as much, 73 percent.

Most of us reliably consume most of any boost in income we see. Not people with massive wealth. An ultra-wealthy household that realizes $25 million in tax savings doesn’t rush out and spend that extra $25 million on food, home improvements, or new clothes. Most of those added millions just add to that ultra-wealthy household’s wealth, and that in turn increases the household’s future income — and future wealth.

In other words, wealth begets wealth, and the giant cut in the taxes our rich people pay, as a percentage of their wealth, has turbocharged how rapidly our nation’s wealth is concentrating. The share of America’s wealth that our top .01 percent hold has quadrupled, rising from 2.3 percent in 1980 to 9.6 percent in 2018. The incomes of the top .01 percent of our nation’s earners have, over the same years, jumped from 1.5 percent to 4.6 percent.

Restoring the tax structure our wealthy faced back in 1980 would certainly slow our nation’s growing inequality of wealth and income. But simply restoring what we had in 1980 isn’t going to reverse the absurd concentration of America’s wealth we have now. The billions our richest have already accumulated will continue to pile up ever higher if we merely go back to the 1980 status quo. Jeff Bezos is currently sitting on well over a $100 billion appreciation in the value of his Amazon stock. None of the value of that stock will land on his federal income tax return until he sells his Amazon shares.

So what can we do? A tax on wealth would be the most direct and rational way to address America’s obscene level of wealth concentration.

Relying solely on taxes on income or real estate property or consumption is never going to adequately reverse how concentrated our nation’s wealth has become. Yes, the wealthy should pay much higher income tax rates on their earnings from wealth. Yes, they should face property taxes and excise taxes on consumption like the rest of us. But the wealthy should also face an additional tax on their actual wealth.

Such a tax would function as a constraint on the accumulation of additional wealth and also raise significant revenue, even if some rich evaded this new levy. Household wealth in excess of $172 million, according to economists Emmanuel Saez and Gabriel Zucman, would represent a tax base of $6.3 trillion. Household wealth in excess of $31 million would represent a tax base of over $13 trillion.

Senator Elizabeth Warren last year proposed a 2 percent tax on wealth above $50 million and a 3 percent tax above $1 billion. If this tax had been in place in 1982, Saez and Zucman calculate, the Fortune 400 share of our nation’s wealth would have increased from 1 percent to 2 percent in 2018. In real life, without that tax in effect, the Fortune 400 share rose to 3.5 percent in 2018.

According to Saez and Zucman, a 10 percent tax rate on wealth in excess of $1 billion would have, if begun in 1982, kept the Forbes 400 share of the nation’s wealth at its 1982 level of 1 percent.

We can’t turn the clock back to 1982. But we can take serious steps to undo the inequality damage we’ve experienced since then. Our suggestion: Let’s add a third tier to Senator Warren’s proposal. On wealth in excess of $5 billion, let’s now impose a 10 percent tax.

Might this levy cause those fortunes well above the $5 billion mark to actually shrink over time? Perhaps, but that wouldn’t be so terrible. After all, any rich household with a mere $5 billion would still have enough wealth to cover $100,000 per day of expenses for over a century.

We would see a far worse result — for our democratic well-being — if we permitted fortunes over $5 billion to grow ever larger. So let’s err on the side of reversing America’s obscene inequality, not protecting multibillionaires.