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Why A Wealth Tax Won’t Work In The U.S.

It seems like the word of the day in Washington is “inequality.” And, it has been for the past, oh, I don’t know, few months. Other popular words from Capitol Hill include inequity and disparity. Turn on any news channel, wait for interviews or speech footage from Elizabeth Warren or Bernie Sanders, and you’ll see what I mean.

They’re specifically talking about wealth. These two ultra-progressive Senators have set their sights on American wealth inequity (there’s that word again), and they have plans to shore up the gap. Of course, it involves the “T-word.”

Warren and Sanders have each presented their version of a wealth tax.

Warren’s plan involves a 2% tax on a household with wealth above $50 million. After that, if you cross the $1 billion threshold, the percentage goes to 3%. Under Sander’s plan, there would be an extra 1% tax on a household’s wealth above $32 million, which would increase up to 8% for those with wealth above $10 billion.

Both Warren and Sanders believe their plans could generate between $2.75 trillion and $4.35 trillion over the next ten years. If either gets their proposal through Congress, the program would be the most dramatic change to taxation in America that we’ve seen in more than a century.

Now, I’d like to invite you for a walk down memory lane. And we’re going abroad for this one. During the 1980s in France, there was a similar effort to raise national revenue by taxing the wealthy differently from the rest of us.

The program was known as The Solidarity Tax on Wealth (STW) and was part of the then-governing Socialist party’s (ahem) electoral program. While the tax was abolished in 1986 by the right-wing government of Jacques Chirac, it was later revitalized in 1988 with slightly different terms.

What was the effect of the STW? It wasn’t pretty. This controversial measure left a hole in the country; critics claim it drove away wealthy individuals from the state, resulting in a net financial loss. In 2006 alone, it is estimated that over 800 people left France because of the tax, resulting in a net loss of €2.8 billion.

In truth, during the reign of the STW, the wealthy left France in droves. Estimates from 2017 from the French government say that some 10,000 people with €35 billion worth of assets left the country from 2002 to 2017 for tax reasons. What’s more, French economist Eric Pichet estimated that the outflows were much more substantial.

As the wealthy moved abroad, the government lost revenues from the STW, along with a range of other taxes they would have paid. Pichet’s calculations of what it made and what it lost show that, under the STW, France garnered about €3.5 billion per year, while losing €7 billion annually from reductions in other taxes.

Over a dozen European countries tried using wealth taxes, but nearly all of these countries have since repealed them for the same reasons as the French did. These others include Austria, Denmark, Finland, Germany, Iceland, Ireland, Italy, the Netherlands, Luxembourg, and Sweden. Today, some version of a wealth tax survives only in Norway, Spain, and Switzerland.

Other than the “tax flight” problem, there are more logistical concerns when talking about any wealth tax.

When we talk about taxing the upper 1%, we have to consider where their wealth, or assets, is held. They don’t just have silos of cash behind their houses. And while they may live in uber-expensive homes and have luxury toys like yachts, they didn’t spend themselves dry on these things. All of these items, along with their shares of publicly traded stocks, would be easy to tax.

But that’s not the whole of how the wealthy live. About 73% of the wealth for Americans in the top .1%, point one percent is in public and private businesses. I can tell you both as a business owner and in working with business owners, that this is where a massive portion of wealth lives is in this country.

How easy would it be for our government to assess the value of a family’s engineering business? Or staffing, HVAC, trucking or insurance company? These businesses don’t trade like stocks – they are illiquid and take a long time to value, sell and move.

Plus, these assets are directly responsible for jobs. So, it doesn’t make sense to have business owners sell off little chunks of their companies every time Uncle Sam comes knocking.

My bottom line on the wealth tax is this: Europe, far closer to Socialism than we are here, tried it, and even they couldn’t make it work. The wealthy just moved elsewhere. In the end, wealth taxes have cost more than they have generated. And there’s no easy way to put a dollar figure on investments in both public and private businesses. Do Warren and Sanders think we could remedy this issue with yet another IRS form?

A wealth tax in America won’t work. And, in my humble opinion, in our free market, Capitalist economy, it feels downright un-American.

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