Bernie Sanders's Dangerous Wealth Tax Distortions

Accurate and representative data is always a necessary ingredient for good tax policy proposals — after all, it’s hard to prescribe a treatment when you don’t have the correct diagnosis. Unfortunately, Senator Bernie Sanders (I-VT) has chosen a period of national crisis to deliver one of his biggest statistical whoppers yet. And just as the underlying data is faulty, his proposed policy recourse would be even more disastrous.

Sanders, relying on data from the left-wing interest groups Americans for Tax Fairness (ATF) and Institute for Policy Studies (IPS), has repeatedly claimed that billionaires are getting rich off regular Americans’ pandemic pain. The current estimate that ATF and IPS are spewing out, and Sanders is amplifying, is that 467 billionaires have seen their net worth increase by over $792 billion since the beginning of the pandemic.

Now, if that were truly the case, Sanders’s legislative proposal for a one-time, 60 percent wealth tax on such gains would appear to be a big money-raiser for the federal government. After all, it would be targeted at windfall profits earned during an unprecedented crisis in U.S. history

There’s just one problem: America’s billionaires have not made off like robber barons during the pandemic. In fact, it takes some fairly blatant cherry-picking of data to claim that they are.

In their analyses, ATF and IPS have repeatedly used March 18 as the starting point of the pandemic, justifying using this date by saying that that was roughly when the lockdowns started to hit. But there’s something else significant about March 18 — whether one looks at the S&P 500, the Dow, or the NASDAQ, it’s near the low point for all these market indices.

After all, the cornerstone of ATF and IPS’s estimates of increases to billionaires’ net worth is the value of their assets — in other words, the value of the stock market. But market performances don’t track neatly with the onset of coronavirus lockdowns. In fact, investors had been growing steadily more worried about the potential economic impact of the coronavirus long before March 18.

Rather, markets roughly peaked on February 19, after which point they dropped by 30 percent or more. Only by ignoring the huge drop that occurred for the month prior to their chosen date can ATF and IPS paint a picture of financial success for the wealthiest Americans.

Given this reality, Sanders’s proposal would be less a tax on “windfall profits” than taxing an economic recovery. And a basic economic truism is that when you tax something, you get less of it. Entrepreneurs facing a sudden decline in the value of their businesses may be inclined to pursue recovery less energetically knowing that at least 60 percent of any value they recover would face taxation by Uncle Sam.

Such taxes could also create severe market distortions. The precedent that net worth can face taxation on the basis of an arbitrary time horizon with no allowances for previous losses would encourage wealthier investors to target assets that are relatively stable. This would unfairly advantage these types of assets over more volatile, but just as financially stable over the long term, assets.

Policy that comes from misleading information is generally doomed to fail. Taxpayers can’t afford that in the middle of a recession.