Bernie Sanders' Wealth Tax Would Be Bad for Workers

The Vermont socialist has always claimed to be a champion of the working class. But over time, his wealth tax would fall heavily on ordinary Americans.

Over the last several weeks, Sen. Bernie Sanders (I–Vt.) has risen to the top of the Democratic presidential polls in key early states. It is plausible that he will win both the Iowa caucus next week and the New Hampshire primary a week later. 

Sanders recent rise is the culmination of a lifetime in politics preaching democratic socialist ideals. And although the particulars of his political vision have shifted in largely unacknowledged ways over time, one throughline has remained remarkably consistent: Sanders has always pitched himself as being a champion of the working class. 

Yet Sanders has proposed a major new tax on wealth that, over time, would come to be paid mostly by workers, depriving them of more than a trillion dollars in wages. Sanders' plan to help the working class would, instead, make the working class worse off. 

Sanders has touted himself as pro-worker and pro-middle class throughout his presidential campaigns. "This campaign," he said in 2015, "is about the struggling middle class." In a speech defending socialism last year, he warned about the dangers of wealth-fueled oligarchy. "It is not just that the very rich are getting much richer. It is that tens of millions of working-class people, in the wealthiest country on earth, are suffering under incredible economic hardship, desperately trying to survive." Sanders' message has been consistent and clear. If he is president, the wealthy will have less, and the working class will have more, in the form of new social spending funded by taxing the rich. 

To that end, Sanders has proposed taxing not only the income of the very well off, but their wealth, in the form of a tax that starts at 1 percent annually on married couples with net worths of $32 million and increases to an 8 percent annual tax on wealth above $10 billion. Although the wealth tax is probably not as central to his campaign as it is to the presidential ambitions of his rival, Sen. Elizabeth Warren (D–Mass.), Sanders' wealth tax is actually more aggressive, imposing a higher top rate, and hitting smaller concentrations of wealth. 

The purpose of Sanders' wealth tax is twofold: first, to fund new government spending on social programs; second, to reduce the fortunes of the very rich and prevent others from amassing wealth in the future. 

As with Warren's wealth tax, there are practical problems: Administering wealth taxes is inherently difficult, in part because it requires tracking and evaluating unique assets, like art and real estate. The wealthy have resources that could and probably would be used to legally avoid the tax. There are serious reasons to believe a wealth tax would raise far less than the $4.6 trillion over a decade that backers estimate—perhaps less than half, according to some estimates—which is one reason why a majority of nations with developed economies that have implemented wealth taxes over the last several decades have abandoned them. 

The prospect that a wealth tax intended to fund an expansion of government social programs might raise far less tax revenue than anticipated should, on its own, be a cause for working class concern. Even if those programs become popular and politically untouchable, finding the revenue to sustain them would be a challenge. And if an initial effort to fund them by taxing the wealthy failed, the incomes and assets of less well-off households would probably enter the discussion. (It is worth noting that the Nordic countries that Sanders often positions as models of social democracy tend to tax middle-income households far more aggressively than the United States does.) Deficit politics may be out of vogue, but at a certain point, some amount of basic fiscal sustainability becomes necessary. And the Sanders agenda, which would start with a government-run health coverage plan that, by the candidate's own estimate could cost $40 trillion over a decade, would test even the staunchest deficit denialism. 

But consider another possibility: What if Sanders' wealth tax raised roughly the amount of revenue promised? Even if that were the case, there is good reason to believe it would still end up hurting the working class, who would, over time, end up paying it in the form of lost wages. 

Strictly speaking, the Sanders wealth tax would be paid only by a relatively small number of wealthy families and individuals. But that doesn't necessarily reveal the full extent of the tax's impact on the broader economy. And according to a recent study by former Congressional Budget Office director Douglas Holtz-Eakin and Gordon Gray, both of whom are now affiliated with the conservative policy organization American Action Forum (AAF), the effects of a wealth tax would extend throughout the economy, reducing the supply of capital and decreasing investment, which would negatively impact worker pay. 

Sanders' wealth tax would cost workers about $1.6 trillion over a decade, they estimate. Over time, as the impact of the tax grew, workers would end up implicitly shouldering about 63 percent of the burden. The wealthy would indeed have less wealth, but workers would come out behind as well. Sanders, the champion of the working class, would effectively be taxing the working class he claims he wants to support. 

It's possible, of course, that these projections, which rely on complex macroeconomic simulations, are off by some degree. But there's little question about the basic underlying mechanism. The very wealthy, almost by definition, control much of the supply of capital, which funds investment, innovation, and, thus, productivity growth. Without investment in productivity-enhancing activities, which allow workers to produce more with the same effort, wages tend to stagnate, affecting workers throughout the income spectrum. 

Nor can the wealth tax be justified on the grounds that its negative effects would be swamped by the benefits of government spending. Yet as Holtz-Eakin said on a recent AAF podcast, even if you believe this is the case, that merely suggests proponents of such spending should find a less economically destructive way to raise the revenue for such spending. 

Because in the end, that's what a wealth tax is: a policy of economic destruction. Its intellectual backers have been explicit in advertising that it is designed to destroy and prevent fortunes, noting how much less wealthy some of the world's richest people would be today if a wealth tax had been in effect over the last several decades. But destroying or preventing fortunes ultimately means destroying or preventing useful and productive investments and innovations, the founding and growth of businesses that employ workers, and the development of services that make the lives of average people better. 

Warren's wealth tax is a gimmick policy designed to support her wonk-populist image as much as it is an actual proposal designed to support an agenda of upper-middle-class protectionism. Sanders' wealth tax is similarly revealing: It's a practical nightmare that he has wildly oversold and overpromised. And if it somehow worked, it would only take down the wealthy by taking down everyone else in the process.