Warren’s Wealth Tax Would Raise $1 Trillion Less Than She’s Promised, Say Boring Budget Wonks

Weirdly, this is good news.

Elizabeth Warren delivers an economic policy speech in New Hampshire on Thursday.
The wealth tax. It’s a good idea, and she should stand by it.
Scott Eisen/Getty Images

Up until her campaign got bogged down in the swamp of sadness known as “Medicare for All,” Elizabeth Warren had worked out a pretty good routine for talking about domestic policy. She proposed a number of ambitious programs like universal child care, free college, and student debt forgiveness, and explained that she would finance them with a wealth tax on the ultrarich—the 0.1 percent. This helped Warren’s run both by turning her into the bête noire of America’s billionaires, who gifted her lots of free press by melting down about her candidacy on television, and by giving her an easy answer about how she planned to pay for her plans.

But was Warren’s math right? The senator’s critics have argued for months now that she was likely overestimating just how much money her wealth tax would raise . And this week, analysts at the University of Pennsylvania’s Penn Wharton Budget Model concluded that she was overshooting by about $1 trillion.

The most recent version of Warren’s proposal would impose a 2 percent tax on net worth above $50 million and a 6 percent tax above $1 billion. The campaign says this would bring in $3.75 trillion over a decade. Penn Wharton—which specializes in conventional, middle-of-the-road budget analysis—estimates the total would likely be $2.7 trillion, if you don’t factor in macroeconomic effects. However, the group believes that the wealth tax would also slow growth, shaving 2.1 percent off GDP by 2050, which would lower collections further.

It is probably best not to worry about Penn Wharton’s economic predictions, which hinge on the somewhat dated idea that taxing wealth will badly hurt business investment because the rich will save much less. This idea might have made some sense 40 years ago, when capital was harder to come by, but the world has been swimming in a glut of savings for decades now. Capital just isn’t that scarce of a resource, which is why interest rates on both government and corporate bonds are still fairly low.

Penn Wharton’s revenue estimates, in contrast, are worth your attention, if only because the results are likely a good preview of how Capitol Hill’s official analysts at the Congressional Budget Office and Joint Committee on Taxation will ultimately score a wealth tax. So why does Penn Wharton think it will raise less than Warren has promised?

Much of the difference boils down to different assumptions about tax avoidance and evasion. Just about everyone assumes that if you slap a tax on billionaires’ wealth, they will do their best to get out of paying it, whether that means legally gaming rules about gifts and trusts, squirreling away assets in secret accounts, or just blowing money on a new super yacht because, heck, otherwise it’d be going to the IRS. This appears to have been a fairly significant issue in countries that have tried to implement net worth taxes, particularly in Europe. However, Gabriel Zucman and Emmanuel Saez, the Berkeley economists who’ve advised Warren’s campaign, think that the rate of avoidance can be kept fairly low if the tax is designed and enforced properly. Penn Wharton looks at the historical literature and concludes that avoidance rates will be high. If avoidance turns out to be even more widespread, the group thinks Warren’s tax might only raise $1.4 trillion (they call this scenario “extreme avoidance”). In the end, both sides are speculating about what the likely outcome would be; it’s fundamentally a disagreement about whether we can learn from past policy failures around the globe or are doomed to repeat them.

It’s an interesting academic debate with real legislative and policy stakes. But here’s the thing: Unless you are fixated on trying to finance Medicare for All, which requires scrounging every single penny of tax revenue you find under the giant, broken-down couch that is America, a $1 trillion difference really isn’t that important in the grand scheme of things (and given her backtracking on single payer, Warren does seem a bit fixated on it these days). In the past, wealth tax skeptics like former Treasury Secretary Larry Summers and University of Pennsylvania Law School professor Natasha Sarin have suggested that the idea would raise perhaps 25 percent to 40 percent of what Warren hoped. What Penn Wharton has shown is that even if you adopt a more conservative set of assumptions than Warren’s team did, the federal government could still conceivably raise $2.7 trillion simply by taxing the net worth of decamillionaires and billionaires.

There are plenty of reasons to be skeptical about a wealth tax aside from its revenue-raising capability, such as whether it’s actually constitutional. But in the end, even the boring, traditional budget wonks are now confirming that it could indeed pay for plenty of nice things.