As 2020 Democrats ponder the merits of a wealth tax, two existing proposals from Sens. Elizabeth Warren, D-Mass., and Bernie Sanders, I-Vt., could have unintended consequences on rich Americans’ marital choices.
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According to an analyses of the two plans by Harvard economist N. Gregory Mankiw, Warren’s plan contains a marriage penalty, while Sanders’ creates a marriage bonus.
Warren’s “ultra-millionaires tax” would apply to those with more than $50 million in assets. The tax would be equal to 2 percent, but would rise to 3 percent for those who have assets valued at more than $1 billion.
Mankiw wrote in an op-ed for the New York Times that those parameters could create “an incentive for high-wealth couples to divorce.” For example, a married couple collectively earning $100 million would be subject to the 2 percent tax shouldered by those with more than $50 million ($1 million per year for them). If they were to divorce, however, each would be worth just $50 million and they would owe nothing.
The same strategy could work for billionaires looking to evade the 3 percent tax, with larger savings potential.
On the other hand, Sanders’ plan contains what Mankiw calls a “trophy wife tax credit,” or marriage bonus.
His wealth tax would be imposed on married couples with a net worth of $32 million or more – and individuals with at least $16 million. Rates, beginning at 1 percent, would reach as high as 8 percent for married couples with $10 billion or more worth of assets (individuals with $5 billion).
By halving the threshold for singles, Sanders creates the opposite problem from Warren's proposal.
“As I understand the plan, if a single man is worth $30 million, he pays $140,000 per year under the Sanders wealth tax,” Mankiw wrote on his blog. “If he marries his assistant, who has a wealth of less than $2 million, their tax liability falls to zero.”
For wealthier individuals, the benefits could be even larger – for example someone with $100 million could reduce their liability by $410,000 per year.
On the flip side, a financial burden would be borne by widows and widowers, who could be forced to pay when a spouse dies.
Critics have pointed to many other flaws in wealth tax proposals more generally, which, as opposed to taxes levied on income and payrolls, target the value of accumulated assets owned by rich Americans – or their net worth.
Some experts caution it could disincentivize capital investment, thereby leading to fewer jobs, less opportunity, less innovation and potentially slower economic growth overall.
Critics also point out that it would be difficult to assign values to items, like private businesses or art, that don’t necessarily have ready market values. The IRS would also need to assign those values on a continual basis.
Meanwhile, there is an ongoing debate over whether the implementation of such a levy is even constitutional.