by Jennifer Schubert-Akin
Joe Biden hopes that his proposals to raise taxes significantly will propel him to victory on Election Day. Biden plans to increase the corporate tax rate by 33 percent, raise individual tax rates, and eliminate the cap on income subject to payroll tax. According to an analysis by the Tax Foundation, Biden’s tax plan will reduce national GDP and ordinary earners’ incomes.
While it’s not currently part of his platform, Biden may also support a wealth tax if he’s elected. Biden has promised to make concessions to the Bernie Sanders and Elizabeth Warren wing of his party, and wealth taxes are one of their top policy priorities. Even if Biden doesn’t explicitly back a wealth tax, he would surely sign wealth tax legislation passed by a Democratic Congress.
Proponents claim a wealth tax is necessary to reduce income inequality and fund various federal government social programs. According to the Sanders campaign, a wealth tax is needed “to reduce the outrageous level of inequality that exists in America today and to rebuild the disappearing middle class…”
Yet a new Census Bureau report shows that income inequality has fallen significantly under President Trump, who has cut taxes on corporations and high earners. Median incomes, especially for minorities, have surged by record amounts, and poverty rates have fallen to historic lows.
The Census report is just the latest indication that there’s no clear correlation between new taxes and less income inequality. Take California, which is one of the most unequal states in the country, yet also has the highest state income tax rate on wealthy earners. New York State, which also has one of the country’s highest top marginal tax rates, is the nation’s most unequal state. In contrast, New Hampshire, Wyoming, and Alaska are three of the most equal states, and they have no state income tax at all.
What explains this apparent contradiction? When governments impose punitive tax rates, they suck productive capital out of the economy. The wealthy don’t just hoard their earnings under a mattress as populists claim. Instead, they use their money to hire new workers, raise employee wages, expand their businesses, make purchases, and invest in other companies and ideas. These funds stimulate the economy and provide the rest of us with the opportunity to live the American dream.
Capital is also mobile and global. Governments that tax it repeatedly or at high levels will chase it offshore just like the U.S. did to roughly three trillion dollars of corporate earnings before the recent tax cuts brought the corporate rate in-line with the developed world average. Remember how major American companies like Burger King and Johnson Controls fled abroad under the Obama administration?
European countries such as France, Sweden, Germany, and Denmark discovered these consequences the hard way. They scrapped their wealth taxes in recent years after failing to bring in expected revenue while pushing out taxpayers. According to French economist Eric Pichet, France’s wealth tax cost the country more than $200 billion, roughly twice the revenue it generated, and reduced the country’s GDP growth. One analysis concludes that the wealth tax chased away 10,000 millionaires from France in 2015 alone.
Art Laffer, Presidential Medal of Freedom award winner, former Ronald Reagan advisor, and Nashville resident, popularized this trade-off between higher tax rates and lower tax revenues with his Laffer Curve. This economic model graphically demonstrates an indirect relationship between tax rates and tax revenues above a certain threshold. Indeed, U.S. tax revenues (before Covid-19) grew after rates were cut.
Laffer will debate Democratic strategist Leslie Marshall over the effectiveness of a wealth tax and higher tax rates at a Steamboat Institute Campus Liberty Tour event, held in conjunction with the Political Economy Research Institute, at Middle Tennessee State University on October 5th. (Dr. Laffer and Ms. Marshall will appear in person; the public can view the debate over livestream.)
Aside from these practical objections to a wealth tax, there are also moral implications. A wealth tax amounts to the confiscation of personal property that has already been taxed at least once before. The Fifth Amendment to the Constitution protects people’s “private property” from being “taken for public use without just compensation.” For this reason, the wealth tax is likely unconstitutional.
As recent history demonstrates, the best way to reduce income inequality and help the middle class is a flourishing economy, which new taxes threaten. Whether a wealth tax and significantly higher tax rates are effective in greasing the path to political power, however, remains to be seen.
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Jennifer Schubert-Akin is the Chairman and CEO of The Steamboat Institute.