Economic effects of wealth taxation

By Kyle Pomerleau of AEI.

"Sens. Elizabeth Warren, D-Mass., and Bernie Sanders, I-Vt., have introduced plans to enact an annual wealth tax. Under these proposals, the net worth of wealthy households would be taxed at rates between 1 and 8 percent per year. The tax base would be as broad as possible to minimize tax avoidance. The stated goals of the proposals are to greatly increase the progressivity of the federal tax code, raise additional revenue to finance new government programs, and reduce the political influence of the wealthy.

A wealth tax, even levied at an apparently low annual rate, places a significant burden on saving. A wealth tax would reduce the after-tax return to saving and would leave to lower national saving. In general, a decline in saving reduces the future income of Americans, limits financing for productive investments, and reduces the U.S.capital stock and total output. However, the impact of a wealth tax on total output depends on the openness of the U.S. economy. If the U.S. economy is open to foreign lending, a wealth tax would have little effect on the U.S. capital stock and output.

On balance, the U.S. economy is open, but not completely. As a result, the wealth tax would have a small impact on GDP. But even if the effect of a wealth tax on output is mitigated by an inflow of foreign lending to the United States, it would have an impact on the U.S. economy through lower gross national product, or national income. A decline in national saving would increase foreign lending to the United States and worsen the United States’ net investment position, or the amount of foreign assets Americans own net of U.S. assets owned by foreigners. That would lead to an increase in payments abroad on those assets and lower payments Americans receive on foreign assets. The openness of the economy also has implications for how the wealth tax affects workers, federal revenue, and the trade balance.

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