By Bilal Hafeez 30-07-2019

Could A Wealth Tax Work? (Planet Money, 22 min listen)

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(You can listen to the podcast by clicking here)

Last week, we discussed the severely widening gap in US inequality . The data we based this on, it seems, has caught Senator Elizabeth Warren’s eye and she is proposing a new measure of redistributing wealth – a policy taxing accumulated assets of the rich instead of their current income. For example, Jeff Bezos has a yearly salary of $100k, but is worth around $120bn, given his stock in Amazon, which is not taxed unless he acts upon it. Warren suggests a yearly 2% tax on wealth over $50mn and 3% for over a billion, claiming it would raise $2.75tn over 10 years. But put this into perspective: wealth grows at c.6-7% per year on average over the long-run, so this won’t stop the rich becoming richer. It would merely slow them down. She has pre-empted some of the critics and has designed the system to avoid the pitfalls that other countries faced historically, such as incentivizing tax evasion and hurting the marginal millionaires such as the elderly. Some of the ultra-rich are more philanthropic, however, and they signed a letter inviting the 2020 Presidential Candidates to consider taxing them more and using the cash for climate change and public health.

Why does this matter? With global trends in tax favouring investment and growth, lower top marginal income taxes, and lighter corporate burdens, Warren’s proposed policy might be tough to pass. There is also scarce evidence it works – from the 12 OECD countries that taxed wealth in the 1990s, only 4 remain. It’s something to watch out and potentially plan for in the 2020 incoming elections.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)