A version of this op-ed originally appeared in Real Clear Markets on June 4, 2019.
Presidential Candidate Elizabeth Warren wants to impose an annual wealth tax on the fortunes of rich Americans. The tax would be limited to households whose net worth is at least $50 million, in other words, to the wealthiest 0.1% of all families. The annual tax rate would start at 2% of a family’s net worth over $50 million and rise to 3% for families with wealth greater than $1 billion. Just 75,000 households would be required to pay the new tax, but Sen. Warren predicts it would raise an additional $2.75 trillion over the next decade.
If the estimate is correct, it would represent a sizeable jump in federal revenues. For purposes of comparison, it amounts to 12% of CBO’s prediction of individual income tax revenue in the coming decade. Many economists, including me, think there are easier and less burdensome ways to boost taxes on the rich. However, Sen. Warren aims not only to raise revenue but also to narrow the gaping disparity of wealth between the fabulously well off and everyone else. Modest reforms in the federal estate and income tax would take far longer to achieve the second goal.
One problem with taxing wealth, especially the kinds of wealth owned by the very rich, is that tax officials would have a hard time determining the value of many kinds of taxed assets. For example, many wealthy families own large stakes in closely held businesses. Unlike publicly traded companies, whose stock price and market value can be observed every day, closely held businesses may be valued rarely if at all. Putting an accurate or even a roughly plausible valuation on them would be a formidable challenge. Anyone who owns a home or piece of real estate in a place where properties rarely change hands can understand the problem. An optimist and a pessimist could assign very different values to the same property, even if both try to make unbiased assessments.
The problem of placing accurate values on different kinds of wealth is linked to the broader problem of determining how wealth is distributed across the population. While there is wide agreement that family net worth is much more unequally distributed than wages or family incomes, there is less agreement on the exact distribution of wealth across rich and poor. There is even disagreement on the trend in wealth disparities. While experts agree wealth concentration has increased since the early 1980s, some analysts see a much steeper rise than what we see in the Federal Reserve Board’s Survey of Consumer Finances (SCF).
Everyone agrees that, using conventional measures of wealth, net worth is very unequally distributed in the United States. Using the most recent survey results from the Fed’s SCF, Edward Wolff estimates that the top 5% of households owns two-thirds of all wealth. In contrast, the bottom 60% owns less than 2% of total net worth. The distribution of pretax money income across households is much less unequal than the distribution of net worth. In the same year covered by Wolff’s wealth tabulations, the Census Bureau estimated that the top 5% of income recipients received 23% of pretax cash income while the bottom 60% of recipients received 26% of the total.
It’s easy to believe the SCF misses some of the wealth of America’s super-rich. Some assets may not be mentioned to government interviewers. Others may be hidden in offshore tax havens. If Congress imposes a wealth tax, the well-to-do are likely to squirrel away an even larger percentage of their wealth in hard-to-find places.
For a couple of reasons, however, conventional measures of wealth probably lead to an overstatement of the gap between families at the top and bottom of the wealth distribution. One reason is that it’s hard to reliably estimate certain kinds of wealth. Surprisingly, one of the hardest to measure at the individual level is an asset that is broadly distributed across the population. Workers enrolled in traditional workplace retirement plans accumulate claims for future pension income. These claims have tangible value that increases as workers approach retirement age. For many workers enrolled in a traditional pension plan, retirement income claims are the second most important form of wealth after net equity in the family home. Unfortunately, few workers can estimate how much their pension claims are worth. Worse, few can give enough information so that an expert can figure out what the pensions are worth. As a result, the SCF does not provide direct information about a sizeable slice of household net worth. The omission is not trivial. The assets that back traditional workplace pensions constitute about 15% of total household net worth. These pension claims are more evenly distributed across the population than other kinds of wealth, so their exclusion from the statistics produces an overstatement of wealth inequality.
Conventional measures of wealth probably lead to an overstatement of the gap between families at the top and bottom of the wealth distribution
If we add less conventional forms of wealth, the overstatement is even greater. One kind of wealth missed in standard statistics is workers’ claims on future Social Security and Medicare benefits. Most of us pay 7.65% of our wages to become entitled to these benefits, and our employers pay the same amount. In exchange, we obtain the right to collect an earnings-related pension when we reach 62 or when we become disabled. We also earn the right to coverage under Medicare when we turn 65. The financial value of these promised benefits is large, especially for Americans in the bottom half of the (conventional) wealth distribution. Eugene Steuerle and colleagues at the Urban Institute have calculated the value of Social Security and Medicare claims for representative workers. A low-wage worker who reaches 65 next year can anticipate lifetime Social Security benefits amounting to $193,000 (discounted to age 65) over the remainder of his life. His expected Medicare benefits, net of required premium contributions, amount to $229,000 (discounted to age 65). Expected Social Security benefits are even higher for workers who earn average or above-average wages throughout their careers. Nonetheless, the Social Security formula is more generous for low-wage workers than for earners who receive higher pay. Consequently, the value of the lifetime benefit increases less than proportionately compared to a worker’s lifetime earnings. Medicare benefits are even more favorable for low-wage contributors, because the promised benefit package is the same for low- and high-wage workers. If the discounted value of Social Security and Medicare benefit entitlements were added to conventional measures of wealth, our estimates of wealth concentration would shrink. For many families with a low-wage breadwinner, Social Security and Medicare wealth represents an overwhelming share of the families’ real net worth.
Another kind of wealth overlooked in standard statistics is the human capital we acquire through education and training. As the payoff to college and post-college schooling has risen, the value of human capital for better educated Americans has soared. Human capital is not counted in the standard wealth statistics. However, those statistics subtract the consumer debt we incur in order to pay for college. After home mortgages, student loans now represent the largest category of consumer debt.
Both mortgage balances and student loans are subtracted from households’ gross assets in order to calculate net worth. In the case of home mortgages, families have an asset—the owner-occupied home—that more than offsets their mortgage. In the case of student loans, the debt is included in the family’s balance sheet, but there is no offsetting asset, because the standard statistics do not count the extra human capital that the loan has helped purchase. In some cases, of course, additional schooling proves nearly worthless. The worker cannot land a better job than the one she held before getting the student loan. This is analogous to a mortgage that helps a borrower buy a home whose price promptly falls. On average, both the mortgage and the student loan help the borrower purchase an asset that is expected to have future value. In the case of the mortgage, standard wealth statistics count both the debt and the asset it has helped finance. In the case of the student loan, only the debt is counted.
Our current tax system typically imposes taxes on the flow of income generated by our wealth. This true whether wealth takes the form of tangible assets, like businesses and income-producing property, or less tangible assets, such as human capital. For one kind of asset we already impose a wealth tax, namely, the property tax on real estate and buildings. Sen. Warren would like to expand this tax to include all the tangible assets over $50 million owned by the nation’s wealthiest families. Whether this is the fairest or most effective way to raise taxes on the rich remains an open question.