Evaluating the Impact of Thomas Piketty’s Wealth Tax on America’s Poor, Rich, and Middle Class

From The Tax Foundation. Excerpt:

"In Capital in the Twenty-First Century, bestselling author and economist Thomas Piketty argues for a tax on wealth, ranging from 0.5 to 2 percent, in order to combat what he views to be the most pressing economic issue of our time: income inequality. This wealth tax is a fundamental element of Piketty’s policy recommendations. However, the implementation of this kind of tax in America is not only impractical, but could also result in large declines in investment, employment, wages, and national output, according to a new analysis from the nonpartisan Tax Foundation.
 

“We found that Piketty’s wealth tax would indeed reduce income and wealth inequality, but at the cost of making everyone significantly poorer,” said Tax Foundation Fellow Michael Schuyler, PhD. “Further, it would be profoundly impractical, considering the large, additional compliance costs it would place on many households, the difficulty of enforcing such a tax, and a constitutional barrier limiting the power of the federal government to impose a direct tax. These problems would not go away even if the wealth tax were global.”

The report finds:

• The basic version of Piketty’s wealth tax would impose a tax rate of 1 percent on net worth of $1.3 million and 2 percent on net worth above $6.5 million. Piketty also contemplates additional tax brackets, including a bracket of 0.5 percent starting at about $260,000.
• Piketty’s basic tax would depress the capital stock by 13.3 percent, decrease wages by 4.2 percent, eliminate 886,400 jobs, and reduce GDP by 4.9 percent, or about $800 billion, all for a revenue gain of less than $20 billion.
• The addition of a tax beginning at a net worth of about $260,000 would reduce capital formation by 16.5 percent, decrease wages by 5.2 percent, eliminate 1.1 million jobs, and reduce GDP by 6.1 percent (about $1 trillion annually in terms of today’s GDP), all for a revenue gain of only $62.6 billion.
• All income groups would be worse off under a wealth tax due to decreased economic activity; in the second scenario, the after-tax income loss for the top quintile would exceed 10 percent, but the losses for all lower quintiles would be in the 7 to 9 percent range.

Although the U.S. government will not be enacting a wealth tax any time soon, it is nevertheless worth evaluating a federal wealth tax so we can better judge whether Professor Piketty’s recommendations would lead us in the correct direction. Also, as tax reform ideas are generated in the future, it is important to know whether a wealth tax might be a constructive part of the mix or whether one should be scrupulously avoided.

This analysis uses the Tax Foundation’s Taxes and Growth Model, a dynamic tax scoring model which estimates the impact that tax changes have on wages, jobs, cost of capital, distribution of income, federal revenue, and the overall size of the economy."