Economics professors weigh in on wealth tax

Stump speeches for the 2020 Democratic primary already include some ambitious economic goals for the next presidency: free public university, medicare for all, complete student loan forgiveness, and maybe even a no-strings-attached $1,000 check every month for every American. With several of these proposed policies requiring trillions (yes, with a “T”) of dollars, the candidates must generate revenue to bring these plans to fruition. So what impact would each proposal have on the broader economy? To explore this question, The Miscellany News contacted four of Vassar’s Professors of Economics for an expert look at where the candidates stand on keystone economic issues.

To start, one of the more nationally controversial proposals—the “wealth tax”—has been embraced by several high-polling candidates. Among the first to formally propose such a tax was Senator Elizabeth Warren (D-MA), who hopes to impose a two percent rate on families whose wealth exceeds $50 million, with an additional one percent tax on each million beyond. Experts predict this tax would affect around 75,000 American families.

Speaking on Warren’s wealth tax, Professor of Economics on the Elizabeth Stillman Williams Chair David Kennett had his doubts, but ultimately was largely positive about the idea: “It could cancel the deficit, pay down some debt, and still give us some money for a social security net, health care, infrastructure, and student loans,” he explained in an emailed statement.

Assistant Professor Esteban Argudo shared his colleague’s belief that the plan has potential. For Argudo, one notable concern would be practical implementation, given the nature of the current tax system. “For it to be successful, one needs to identify all individuals with a net worth above $50 million, which in principle could be self-reported,” he wrote. “But basic economics tells us that some people might then have an incentive to misreport.”

Associate Professor Benjamin Ho shared Argudo’s logistical doubts, adding, “I also worry that it would discourage entrepreneurs. If you started a company and controlled 51 percent of it, and was then forced to pay one to two percent of your wealth in taxes, this means you lose control of the company after a couple years.” He went on, “[T]he majority of economists oppose it.”

Another potential issue, Associate Professor Robert Rebelein warned, is that Warren’s tax could incentivize wealthier families to move outside of the United States to avoid paying stiff rates.

“A number of European countries have tried wealth taxes in the past and most have done away with them…Rich people will leave the country and take their wealth elsewhere if it will be taxed here. Last year nearly 4,000 people renounced their U.S. citizenship, probably mostly because of the taxes they would have to pay here. If there were a wealth tax, presumably many more people would leave,” said Rebelein. Still, he noted, “Warren’s plan is prepared for this and will impose a tax of 40 percent on wealth over $50 million of people who want to renounce their U.S. citizenship. That might be enough to keep them here.” 

The wealth tax also carries a legal question. As Kennet explained, some well-known politicians, including the mostly progressive Michael Bloomberg, argue that it is unconstitutional. “[T]he Sixteenth Amendment, while establishing the income tax, specified that it was only the Federal tax that would not be levied proportionally among the states,” Kennet elucidated. Many critics argue that the wealth tax would require a constitutional amendment. 

Warren’s plans aren’t the only in the field that raise new questions for the Econ professors in Blodgett Hall. For instance, self-professed “centrists” have followed Vice President Biden in proposing an alternative to Warren’s wealth tax by removing what is called the “step-up in basis,” where assets that rise in value are not taxed when passed down through family (New York Times). Removing the step-up in basis would collect more than $50 billion a year. 

However, this more modest plan would still generate less revenue than a full-blown wealth tax. “Taking $50 billion per year more from wealthy families would be much less than the proposed wealth tax might generate,” stated Rebelein. Ho echoed this sentiment, adding that only inheritances are affected, which comprise a smaller portion of the economy than the wealth Warren’s plan would tax. “They both have the same effect of increasing taxes on the wealthy, but Biden’s approach is a small, incremental practical step, while Warren’s change is quite drastic,” he summarized.

Another point of contention between the candidates is the proposed use of revenue. Warren promises her tax’s revenues will fund several plans, including student loan forgiveness and free tuition at public universities. Fellow candidate Senator Bernie Sanders (I-VT) supports these latter two policies, though his student debt reduction plan differs. Warren would divvy out student loan cancelation or forgiveness based on household incomes and separate canceled debt from taxable income. This would cancel all student loan debt for 75 percent of Americans and cost roughly $640 billion. Bernie Sanders would cancel student debt for all, an endeavor totaling of nearly $1.6 trillion. 

Vassar’s professors expressed mixed feelings about either plan. Ho stated his respect for the “moral conviction” of Sanders’ tuition-free college plan, even though it costs more. “Warren’s plan lacks that moral clarity, and does all this careful targeting, which I approve of, but it winds up still helping rich lawyers, which seems wrong,” he explained. Other economists also cautioned about the effects of debt cancellation. Rebelein stated that it could lead to disproportionate withdrawals of student loans, while Kennett noted that “wiping the slate clean” could allow for another round of exploitation by for-profit universities. 

Still, Argudo argued that Sanders’ tax plan to fund debt cancellation would be more feasible: “Although Warren’s plan requires less funding, since it is only partial forgiveness, I think the proposed wealth tax plan would be harder to implement than Sanders’ tax on financial transactions…Any time a financial transaction takes place, the trading price and volume are already recorded, so it would be easy to collect the corresponding tax on those.”

Clearly, the professors weren’t fully convinced by any of the frontrunners’ plans. Next, we turned to a dark-horse candidate who has seen a considerable amount of media attention. Marianne Williamson, a self-help guru who runs on a platform of “love,” remains vague in her promises to America. Many of the economists interviewed noted that her increase in popularity is a political, rather than an economic, concern. Speaking to Williamson’s vague economic policies, Kennett wrote, “I do not want to be so cynical, but there always is some support for ‘All you need is love!’ I liked that at my daughter’s wedding—not so much in a Presidential platform.”

Another candidate, Andrew Yang, has a unique campaign featuring a comprehensive set of policy proposals, one of which is his promise of a Universal Basic Income (UBI) of $1,000 per month to anyone above the age of 18. 

Yang provides his wife, Evelyn, as an example of why he offers UBI: As a stay-at-home mom, her labor is unpaid and therefore not counted in the annual GDP. But Yang’s proposal could impact job markets, potentially encouraging people to quit working. Funding, as with the other plans, remains a concern. Argudo broke down the math: At $12,000 a year to all U.S. citizens over the age of 18, or 234,047,401 people, the UBI would cost $2.809 trillion a year. 

“To put it in perspective, right after the crisis in 2009 the total tax revenue raised by the U.S. government was about $2.105 trillion. In 2018 it was $3.329 trillion, according to the Congressional Budget Office. In other words, over the last decade and with all sorts of efforts to promote an economic recover, tax revenue increased by $1.224 trillion. That is the sort of increase in new tax revenue that Yang’s plan would need to finance universal basic income,” Argudo summarized. “It could be realistically made, but definitely not in the short term!” 

Kennett shared a similar sentiment, noting, “the federal deficit—the amount that the government spent that it did not pay for—was $0.78 trillion last year and will rise to $1.1 trillion this year…Yang proposes a tax that is new to America, though well established in Europe—the VAT or value added tax. VAT is in my opinion a good, non-distortionary tax: It has been one of the successes of economists to get politicians all over the world to accept it. However, it can’t do the whole job.”

Despite the VAT’s popularity, Ho wondered if Yang’s plan would invite less employment. As he put it, “Encouraging people to quit working means a less productive economy. You might think that’s fine; a lot of what the economy makes wouldn’t be missed. But a smaller economy also means less health care, less education and less of lots of other things that we probably think are important.” Though dubious about Yang’s plans, he conceded better valuing of the work of those who lack formal employment, such as stay-at-home mothers.  

With such a wide field for the 2020 race, distinguishing between each candidate’s plans for the major issues, including the economy, becomes a murky exercise. With buzzwords and rousing rhetoric abounding, these economics professors lend a dash of expertise.

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