Watch Out for a Post-Coronavirus Wealth Tax Resurgence
With the exit of Senator Bernie Sanders (I-VT) from the Democratic primary, some have concluded that debates over wealth taxes are likely to fade in the ensuing general election season. But before policy wonks pat themselves on the backs too vigorously for vanquishing another dangerous idea, the European economists pushing the idea most fiercely foresee an opportunity to bring the issue back to the forefront in the aftermath of coronavirus relief packages.
Economists across the spectrum agree that the correct policy to address the novel coronavirus involves accepting the significant short-term economic contraction that social distancing entails, withbroad-based relief to bridge the gap between now and the time when the economy can open back up again. That (and low interest rates) was the logic behind the $2.2 trillion package recently passed by Congress, involving cash payments to individuals and loans to businesses. While some of this includes loans, there’s no way around the fact that the budget impact will be substantial by the time the national emergency period is over.
Emmanuel Saez and Gabriel Zucman, French economists employed at the University of California-Berkeley, have a proposal for how countries could pay for debts incurred as part of the coronavirus response. As it happens, it is the exact same idea they have been proposing for years — a wealth tax.
Saez and Zucman are well-established wealth tax crusaders, having advised both the Warren and Sanders campaigns on their wealth tax proposals. The two also wrote a book analyzing wealth inequality in the United States, spawning numerous fawning media columns that ignored serious methodological issues. While their aforementioned proposal addresses Europe, there is little doubt they would endorse the same idea in the United States, as would many progressives.
But Saez and Zucman’s pet policy issue would be particularly poorly targeted to coronavirus recovery. The goal of policy responses to the coronavirus during this period of national emergency has been to create a coiled spring — tolerating an economic contraction in the meantime, while at the same time preserving the ability of the economy to spring back to its prior state as soon as the need for social distancing passes. Implementing a wealth tax in the aftermath of the coronavirus would be the equivalent of kicking out the back of someone’s knees just as they prepare to jump.
A wealth tax would dramatically increase the cost of making new investments or economic ventures. As the structure of a wealth tax means that every asset over a certain threshold would be subject to a tax regardless of its performance, it heavily penalizes normal asset returns while effectively exempting windfall returns from tax. Discouraging investment is a result to be avoided in any economic environment, but it would be particularly harmful as the nation seeks to rebound from a recession.
Private philanthropy will also be a crucial component of coronavirus recovery alongside federal aid. A wealth tax would likely target charitable foundations’ endowments and the wealth of their donors, reducing these foundations’ capacity to continue their charitable activities. Considering that private foundations donated $75.9 billion in 2018 alone, a substantial curbing of foundation activities would significantly harm efforts to rebound from this recession.
It would also dramatically undercut philanthropic institutions engaging in important public health work. Bill Gates, the billionaire Microsoft founder and head of the Bill and Melinda Gates Foundation, announced that his charity would be spending billions of dollars to build factories for seven potential coronavirus vaccine candidates, even though only one or two of the vaccines would be chosen for production. Life-saving work like this would be much more difficult if a wealth tax foolishly targeted not just the wealthy but the charities to which they donate.
A wealth tax is a bad policy under any environment, but it would be particularly pernicious during a recovery. Taxpayers should be wary of ideological crusaders’ hamfisted attempts to use budget shortfalls as an excuse to revive this poor policy idea.