What would a wealth tax mean for non-billionaires?

Could a wealth tax motivate billionaires to work less?

By imposing a steep tax on extremely wealthy Americans, Democratic presidential candidate Elizabeth Warren has vowed to fund a number of wide-ranging social programs such as universal health care and eliminating student debt, but does she risk motivating billionaires to work less by doing so?

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Under Warren’s plan, which she rolled out in January and revised in October, there would be a 2 percent tax on individuals worth more than $50 million, and a 6 percent tax on those worth more than $1 billion. The Massachusetts Democrat’s campaign said the tax -- intended to combat rising income inequality -- would apply to less than 0.1 percent of the population, or roughly 75,000 families.

“Look, somebody has a great idea, and they follow it through and they work hard and they build something, good for them," Warren has said, when asked whether she thought billionaires should exist.

However, the Massachusetts senator usually follows that with a caveat: Because billionaires like Amazon CEO Jeff Bezos, Microsoft founder Bill Gates and Oracle founder Larry Ellison rely on taxpayer-funded roads, bridges, police, firefighters and educated workers to build their businesses, she said, they needed to pay steeper taxes.

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She argues a wealth tax would close the growing gap between the haves and have-nots by redistributing a portion of those vast fortunes to socially beneficial purposes.

Still, that could have broader ramifications for the economy -- and everyday Americans: The number of billionaires in the U.S. corresponds closely to the world’s largest, most successful companies, according to Forbes. While that doesn’t necessarily mean billionaires generate a successful economy, it does show the two are closely associated. (That list excludes monarchs and other country leaders whose wealth is tied to their position of power).

In a 2016 book, economist Caroline Freund found that countries with more billionaires per capita had higher incomes per capita, according to The Wall Street Journal. And countries with less self-made and more inherited wealth tend to slow grower than their counterparts where the reverse is true.

While a majority of Democrats, and some Republicans, support increasing taxes on inherited wealth, a wealth tax, which is also embraced by Democratic candidates Bernie Sanders and Tom Steyer, taxes wealth regardless of how it was acquired.

As a result, it seems likely that billionaires would respond in some way to try to dodge the new levy, as they have with high state taxes. According to a report authored by Stanford University economists Joshua Rauh and Ryan Shyu this year, California’s tax hike in 2012 caused 0.8 percent of Californians who were in the top tax bracket to move in 2013, mostly to states with zero income tax (including Washington, Texas, Nevada, Idaho and Colorado).

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The authors analyzed taxpayers earning more than $5 million in 2012, and found that departures spiked to 2.125 percent in 2013, compared to 1.5 percent in 2011. On the other hand, moving rates for taxpayers earning under $2 million were “negligible.”

In a separate study, economists Enrico Moretti and Daniel J. Wilson determined that star scientists, like those creating power technology or biotech companies, tend to leave states with relatively higher personal or corporate income taxes.

Not only are star scientists generally productive workers with high-income levels, but they “are an important group of workers because their locational decisions have potentially large consequences for local job creation,” the economists wrote.

“Unlike professional athletes, movie stars, and rich, elderly people — the focus of some previous research — the presence of star scientists in a state is typically associated with research and production facilities and in some cases, with the fostering of new industries from biotech to software to nanotech,” they added.

However, on the other hand, Gabriel Zucman, an economist at the University of California who helped design Warren’s tax plan, has argued that unlike a state tax, American billionaires can’t avoid the wealth tax introduced by Warren. He also insisted the tax wouldn’t deter entrepreneurs from taking risks and building companies, because they aren’t solely motivated by money and taxes, the Journal reported.

Gates, who’s worth about $107 billion, founded Microsoft, he noted, when corporate, personal and estate taxes were significantly higher than today. Instead, he said, the wealth tax would result in fewer hereditary billionaires and more self-made wealthy individuals. Gates would actually pay $6.379 billion under Warren’s plan.

Microsoft co-founder Bill Gates revealed the biggest mistake he's ever made. (Reuters)

There has never been a wealth tax in the U.S. In fact, tax law in the U.S. has become significantly less progressive in recent decades, according to a paper by the economists who advised Warren. All three traditional taxes -- the individual income tax, the corporate income tax and the estate tax -- have weakened. For instance, the top marginal federal income tax rate has fallen dramatically, from more than 70 percent between 1936 and 1980 to 39 percent in 2019.

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