Elizabeth Warren’s Tax Plan Would Bring Rates Over 100% for Some

Presidential hopeful proposes wealth tax and levy on unrealized gains, a combination that could alter investing

By Richard Rubin of The WSJ. Excerpts:

"She wants to return the top income-tax rate to 39.6% from 37%, impose a new 14.8% tax for Social Security, add an annual tax of up to 6% on accumulated wealth and require rich investors to pay capital-gains taxes at the same rates as other income even if they don’t sell their assets.

Consider a billionaire with a $1,000 investment who earns a 6% return, or $60, received as a capital gain, dividend or interest. If all of Ms. Warren’s taxes are implemented, he could owe 58.2% of that, or $35 in federal tax. Plus, his entire investment would incur a 6% wealth tax, i.e., at least $60. The result: taxes as high as $95 on income of $60 for a combined tax rate of 158%."

"tax rates of over 100% on investment income would be typical, especially for billionaires."

"Ms. Warren has talked most about her plan, announced in January, to impose a 2% annual tax on wealth above $50 million and 3% above $1 billion, which she doubled to 6% this month to pay for Medicare for All. Sen. Bernie Sanders of Vermont, a rival for the nomination, proposed a similar tax."

"Currently, capital gains are taxed only when an asset is sold and the gain is “realized,” and those gains escape income taxes at death. That means gains on assets that never sold are never taxed, so fortunes can grow without triggering any income taxes."

"Under current law, investors without dividends can add their annual gains to their fortunes and pay little or no income tax. After Ms. Warren’s one-two punch, some billionaires who generate pretax returns could pay annual taxes that would leave them with less money than they started with."

"Under Ms. Warren’s plan, their unrealized capital gains outside retirement accounts would be taxed at 39.6%, just like ordinary income, plus an existing 3.8% investment-income tax. Add to that her new 14.8% investment-income tax to bolster Social Security, and state taxes, and combined tax rates could reach 70% in California and New York City.

"The effective tax on business investment could actually be higher because these personal taxes would come after a company has already paid a corporate tax rate, under Ms. Warren’s plan, of 42%, up from 21% now."

"The Penn Wharton Budget Model, a research group, estimates in a preliminary report that a 3% wealth tax above $50 million, which isn’t exactly Ms. Warren’s plan, would reduce the growth rate of gross domestic product over the next decade by an annual average of 0.2 percentage point and the capital stock—all the equipment, structures, and intellectual property that companies employ—by 4.3%."