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Warren's Wealth Tax: Unfair, Harmful and Un-American

Warren's Wealth Tax: Unfair, Harmful and Un-American
(Sheila Fitzgerald/Dreamstime)

Michael Busler By Monday, 21 October 2019 12:36 PM EDT Current | Bio | Archive

Massachusetts Senator Elizabeth Warren, Democratic candidate for President, has proposed the passage of a wealth tax. The tax would be 2% annually on net worth between $50 and $100 million, and 3% on net worth above $1 billion. This is a disastrous proposal for America.

Warren says that income inequality has worsened. The gap between the richest Americans and the average Americans is widening. Warren points out that this is simply not fair that a few people have so much, while many people have so little. To correct this, she wants to impose a wealth tax, which, coupled with social programs, would re-distribute income

That means families that have worked years, perhaps decades, to accumulate wealth, will be forced to pay millions in extra taxes each year. Their extra earned income is already taxed at 37% while their capital gains are taxed at 20%. Even after paying those taxes, Warren wants an additional tax of at least $1 million and as much as $50 million annually, simply because the income earner is wealthy.

Warren’s proposal seems to have gotten more attention when a recently released study examined the tax rate of the 400 highest income earners. The authors noted that for the first time in history, when considering total taxes paid to all levels of government, the 400 highest income earners paid a lower tax rate than the average middle-class income earner.

Many Americans seemed to indicate that is blatantly unfair. The highest income earners should pay a higher rate tax than average Americans, most reasoned. That’s why we are have a progressive tax system, which is supposed to ensure that the tax rate increases as income increases.

The middle class does pay a slightly higher rate than the top 400 income earners only when all government tax liability is considered, including all federal, state and local taxes. That’s because while most state income tax rates are progressive, the social security tax, property taxes and sales taxes are regressive, meaning the tax rate declines as income increases.

If just the federal income tax is considered, then the top 400 do pay a higher rate than the middle class.

According to the IRS, in 2014, the 400 top income earners each paid an average of $80 million in federal income tax on an average income of $317 million. For a middle-class income earner with the median income of $65,000, a total of $16,000 was paid in federal income taxes.

Granted the high-income earner did very well, but what did they get for the $80 million they paid in taxes? Regardless of income earned, should each of these highly successful people have to pay $80 million per year in taxes?

And Warren wants them to pay millions more.

Not only is Warren’s proposal blatantly unfair, but it is counter-productive. That’s because a wealth tax would reduce capital formation and tend to stagnant the economy. The reason is very simple. New capital is supplied to the economy mostly by higher income earners. By raising their taxes, less new capital is created.

Our economy today is capital-intensive. That means for manufacturing and even the service sectors to grow, new capital is needed. More capital means more growth. Less capital means less growth.

Less growth also means greater income inequality. As we saw during the economic stagnation from 2008 to 2016, the slow growth provided opportunity for higher income earners, while those at the lower end saw few opportunities and a stagnant income. Income inequality worsened.

Income inequality will lessen as the economy expands. Inequality would be quickly reduced if the country could return to true prosperity. That means growth would have to exceed 4% annually. We haven’t experienced annual growth exceeding 4% since 2000.

Growth averaged 4 ½% annually from 1997 to 2000. The reason was simple. Congress did just the opposite of a wealth tax. That is, the capital gains tax rate was reduced from 28% to 20%. This primarily benefited the capital creating, high income earners, at least initially.

But the low tax rate encouraged increases in investment which spurred the high economic growth. Investment and total economic activity increased so much that the tax revenue from capital gains tax actually increased after the rate was cut. Why? Simply because 20% of $1,500 (or $300) is larger than 28% of $1,000 (or $280).

In addition, President Clinton in his 1996 State of the Union speech declared that the “era of big government is over.” He then worked with Congress to not only balance the budget, but have a budget surplus. That led to prosperity from 1997 to 2000.

Warren’s wealth tax and the corresponding huge increase in government spending to pay for her social programs, like Medicare for all, is the exact opposite of what President Bill Clinton did. Clinton’s policies led to prosperity. Warren’s policies will lead to economic stagnation.

Worse yet, Warren’s wealth tax and her big government solutions are un-American. Recall the US went from the birth of a nation to the largest most prosperous economy in the world in about 150 years. That’s because we followed four basic principles. We encouraged individual freedom, individual responsibility, low rates of taxation and a limited role for government.

Warren’s wealth tax is opposite to those principles. Warren’s wealth tax is unfair, counter-productive, growth slowing and just plain un-American.

Dr. Michael Busler, Ph.D., is a public policy analyst and a professor of finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in finance and economics. He has written op-ed columns in major newspapers for more than 35 years.

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Warren’s wealth tax is opposite to those principles. Warren’s wealth tax is unfair, counter-productive, growth slowing and just plain un-American.
warren, wealth, tax, american
Monday, 21 October 2019 12:36 PM
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