Elizabeth Warren's Wealth Tax Would Hurt More Than Just the 'Tippy Top'
Wealth tax proponents claim only super rich people would be affected. But to raise the revenue Warren, Sanders, and Biden want, they'd have to tax the "working rich"—doctors, lawyers, and other hardworking high earners.
When running for president in 2020, Elizabeth Warren championed trustbusting and Medicare for All, the Green New Deal and regulation of big banks. But her plan's pièce de résistance was a proposed "2-cent" tax on "ultra-millionaires." She chirped that it would fall only on the "tippy-top," that tiniest fraction of 1-percenters who have accumulated the most wealth in America. Taxing the wealth of the tippy-top isn't just a Warren concept, though. Just last week, President Joe Biden announced the newest rendition of his budget, which calls for a wealth tax on households worth more than $100 million.
"A family with a net worth of more than $50 million"—or the richest 75,000 households—would "pay a 2% (or 2 cents) tax on every dollar of their net worth above $50 million and a 6% (or 6 cents) tax for every dollar above $1 billion," Warren said. The $3.75 trillion in revenue she hopes to bring in with this tax over the next 10 years would be key to how she plans to pay for other items on her big-government wish list, like canceling student debt and free universal pre-K and Medicare for All.
Other estimates, however, like one from the Tax Foundation, say Warren's tax would bring in only about $2.2 trillion. But her spending plans would cost more than $30 trillion over the next decade according to estimates by The New York Times.
Warren's attempts to make such ambitious spending plans seem easily paid for is a form of smoke and mirrors common to big spenders on the left, even those who aren't tethered to $30 trillion agendas like Biden. These plans, and the rhetoric with which they are promoted, indulge in a fantasy that expansive, expensive progressive agendas can be paid for exclusively by taxing the superrich, without any direct cost to ordinary taxpayers, or even to the affluent.
The reality is that in order to actually raise the amount of money progressives like Warren want to spend, they'd almost certainly need to tax a much larger base: the "working rich."
The "idle rich"—the multimillionaires who progressives like to portray as sitting on huge piles of money they inherited or earned via unsavory means—just aren't large enough to serve as an actually useful tax base. They're some of the wiliest folks around, ready to move money overseas or engage in tricky tactics to avoid the prying hands of the federal government if incentivized to do so. Many countries that have implemented wealth taxes have later reversed those decisions due to capital flight and impracticalities of enforcement, including Austria, France, Sweden, and the Netherlands.
Every time Warren talks about her paid-for wish list proposals, she's talking about taxing the working rich. The reason why it never happens, though, is because it would be political suicide to tax such a key constituency.
Think of rich people in America as divided into two camps. "Idle rich" may be celebrities or people who sold massive companies or inherited vast sums. Perhaps they own yachts. Perhaps they have the last name Walton or Sackler or Hearst.
"Working rich" are different. You may interact with them. You may be them. These are doctors and lawyers and other high-earning white-collar professionals in large and mid-sized cities. They're not untouchably rich—not private jet rich, butler rich, or yacht rich. In many cases, they were born on second base—beneficiaries of solidly middle-class parents who helped them attend good secondary schools or pay for college—but were not silver spoon-fed. They may have taken on debt to get advanced degrees before ultimately working in high-grossing industries.
Though there's no hard and fast rule as to what level of wealth or income warrants this label, an Economic Policy Institute report from 2018 indicates that "a family in the US needs an annual income of $421,926 to be in the top 1% of earners." And to be in the top 5 percent of earners, a family would need an annual income of about $250,000. Depending on debt and assets, people in these brackets might qualify as working rich.
In fact, Elizabeth Warren herself is a great example of the working rich she would need to go after. Born in Oklahoma City as the '40s were winding down, she described her big family as "hanging on at the edges by our fingernails." Her father, a salesman, found himself sinking into a hole of medical debt. A star debater, she won herself scholarships. Though her schooling advanced in fits and starts due to marriage- and pregnancy-related interruptions, she ultimately got a law degree from Rutgers.
Now, her net worth (shared with her husband, Harvard law professor Bruce Mann) is more than $12 million. She's earned it through real estate holdings, consulting dough, book royalties, a Senate salary, and various retirement accounts. But it's upwardly mobile, industrious people like her who threaten to go extinct if she gets her way.
In the past, Democratic Party was synonymous with working-class voters. But in recent years, poor and working-class voters have been increasingly abandoning the party, while highly educated "working rich" types have co-opted it, sometimes even shifting platform and focus toward their pet issues—racial justice initiatives like "defunding" the police, which gained airtime in 2020 but did not poll well or perform well electorally, especially with the poor minority voters who activists' messaging was ostensibly meant to target.
The data back this up. "College-educated white people, in relative terms, swung toward Democrats by a lot, and non-college-educated white people swung, in relative terms, against us," analyst David Shor told Politico in the aftermath of the 2020 election, when Democrats won the White House and held onto the House (losing several seats in the process).* "The joke," Shor said, "is that the GOP is really assembling the multiracial working-class coalition that the left has always dreamed of."
"One of the Democratic Party's core problems is that it still regards itself mainly as the party of the underdog," wrote New York Times columnist David Brooks in 2021. But this self-image isn't really accurate.
"Democrats dominate society's culture generators: the elite universities, the elite media, the entertainment industry, the big tech companies, the thriving elite places like Manhattan, San Francisco and Los Angeles," he argues. "In 2020, Joe Biden won roughly one-sixth of the nation's counties, but together those counties generate roughly 71 percent of the nation's G.D.P."
The white, college-educated voters described by Shor and Brooks who live in big cities and dominate cultural institutions could also be referred to as the working rich. Democrats doing anything to threaten this group's bottom line would be a huge problem for winning elections.
SALT deductions are a great example of how this plays out in practice. It's homeowners with six-figure salaries who incur high property and state income taxes and often want higher allowable SALT deductions. Since this allows some people to deduct state and local taxes from their federal tax bills, it's a huge win for the wealthy people living in states like New York and California who end up needing to cough up a lot to the government at all levels. During squabbles over Biden's Build Back Better legislation, several congressional Democrats threatened to sink negotiations if the SALT deduction wasn't raised—yes, raised.
In other words, when push came to shove, Democrats weren't actually willing to put the cost of their agenda on the working rich.
But it's the working rich they'd need to levy taxes on to pay for the things they desire. Consider the case study of an estate tax, which is another form of wealth tax that's been toyed with over the past few decades, changing drastically over the last 20 years: Right now, an estate tax applies to estates worth over $11.2 million. This ends up being a very small number of estates: In recent years, the tax has applied to only about 1,900 estates annually, bringing in a little less than $20 billion to the federal government.
If reduced to estates worth $3.5 million ($7 million per couple), the tax would suddenly apply to many more estates and bring in more like $30 billion annually. In 2001, when the estate tax was $675,000 (and higher for couples), more than 50,000 estates paid the tax, coughing up almost $24 billion ($38.5 billion in today's dollars). A much broader base is needed than just a few thousand families if the federal government wants to generate any significant amount of revenue, something Warren won't readily admit.
But it's more than just politically unpopular for Democrats to sic the IRS on their reliable-voter constituents: it also does not make a lot of sense practically, since taxpayers who make $200,000 and above annually pay nearly 60 percent of total federal income taxes, despite accounting for only 4.5 percent of total returns filed annually, per Pew data from 2015. ("By contrast, taxpayers with incomes below $30,000 filed nearly 44% of all returns but paid just 1.4% of all federal income tax," Pew reports. And, "two-thirds of the nearly 66 million returns filed by people in that lowest income tier owed no tax at all.")
Although it is true that the wealthiest 0.1 percent has tripled its share of American wealth since the late '70s, going from holding about 7 percent of total American wealth then to about 22 percent now, the richest American households—whether just those making over $200,000 annually or the millionaires that comprise the 0.1 percent—already contribute such a significant amount to federal coffers that the idea that they shirk social responsibility, evading taxes and hoarding their wealth, is one that doesn't hold much water. The richest 1 percent contribute about 40 percent of total federal income taxes, but they bear other burdens, too—most obviously, property taxes, but also corporate income taxes, which Josh Barro at his Substack Very Serious describes as part of the indirect tax burden felt by shareholders.
Besides, the working rich are precisely the people we want to keep doing what they're doing; they're stable economic contributors who are unlikely to rely on government welfare. Plus, we need a steady stream of people becoming doctors and lawyers, responding to incentives to do so. The U.S. has a physician shortage problem; the country will be an estimated 139,000 doctors short come 2033. In 2021, total applications to law schools were down by 5 percent, breaking a five-year streak in which the country had a glut of would-be lawyers. For jobs that require years of postgraduate study, and oftentimes accompanying debt, the promise of high salaries later on compels people to take on these sacrifices.
The working rich are those who invest in the stock market, those who keep economic engines running. The top 10 percent of American households, measured by net worth, hold "84 percent of all of Wall Street portfolios' value," according to The New York Times, which used Federal Reserve Board data to calculate this. A collapse in these investing habits would create knock-on effects that would harm the American economy for years to come.
The working rich stimulate the economy in all kinds of good ways. And they haven't just reached that level by being leeches on others.
Bureau of Labor Statistics and Federal Reserve data show that about 21 percent of American households will receive an inheritance or other wealth transfer (like assistance with a home down payment, for example); inheritances aren't typically vast sums, but most commonly fall somewhere sub-$50,000. Only 2 percent of inheritances are greater than $1,000,000, according to Federal Reserve data, though those large inheritances are commonly concentrated among already-high earners. Still, for the top 1 percent, inheritances account for a little under 15 percent of those individuals' total wealth on average and are not commonly received until after peak earning years. Though inheritances certainly add to the wealth that rich people have already accumulated, and though knowledge of an inheritance may be something that affects rich peoples' earlier decision making, inheritances are not exclusively a wealthy person phenomenon or even something that too drastically changes the outcomes of the median rich person. In popular imagination—think Kendall Roy of the hit show Succession—wealthy people merely burn through other peoples' fortunes instead of earning their own. In the real world, this just isn't true.
Last year in Congress, Sen. Ron Wyden (D–Ore.) proposed a tax on unrealized capital gains, modeled after one floated by Warren, that would hit "people with $1 billion in assets or those who have reported at least $100 million in income for three consecutive years," per The New York Times. Warren and Wyden found willing co-conspirators in fellow Democrats Speaker Nancy Pelosi and Sen. Bernie Sanders (D–Vt.). And Biden described his newly unveiled plans to tax the unrealized capital gains of households worth over $100 million as "a prepayment of tax obligations these households will owe when they later realize their gains." (Never mind that it would be a tax on money that hasn't been made yet, money that might not be made at all.)
Proposals like these represent a fundamental shift in what we consider fair game to tax. They would suddenly allow the federal government to tax wealth as it sits there, as opposed to when things are bought and sold, or when money is earned. The implications of this would be huge, starting—but not ending—with the impracticality of enforcement, which has again and again proven too burdensome for other countries' bureaucrats to effectively manage, leading to embarrassing repeals of wealth taxes almost every time it's been tried.
Even if Democrats could pull off passing and implementing a broader wealth tax, it's not clear they'd be willing to pay the cost of alienating their rich new base.
*CORRECTION: Democrats won a majority in the Senate.