The math looks like this: For a rich family’s assets that either appreciate over time slowly or not at all (like houses, fine art and yachts), the 6 percent wealth tax would purely reduce wealth — much faster, for example, than local property taxes on real estate holdings that tend to be between 1 percent and 2 percent in much of the country.
For safe investments like bank deposits or municipal bonds, a 2 or 3 percent wealth tax may well eat up around 100 percent of interest earnings, meaning those savings might hold steady over time, whereas a 6 or 8 percent tax would reduce wealth.
The same family might earn well more than 6 percent or 8 percent on higher-risk investments, like holdings of stock in a company or private equity funds, meaning they could still accumulate wealth, even with a wealth tax. But they would have other new taxes to contend with.
Notably, Ms. Warren’s Medicare for all funding plan also includes an idea to require investors to pay capital gains taxes each year as their assets rise in value. Current law allows investors to delay any capital gains bill until they sell an investment, so people can accrue vast fortunes without ever paying taxes on the wealth. This would be harder to do with annual capital gains tax obligations.
Moreover, the existence of these taxes would increase the incentive for a rich person to take steps to avoid taxes, many of which would have the similar effect of reducing their wealth. If you are a billionaire planning to give much of your fortune to charity after your death, why not do so immediately to avoid spending decades paying a 6 percent annual tax to the government? Or, perhaps less nobly, why not spend it on leasing yachts or chartering private jets for fantastic vacations?
“We have that backdrop of avoidance strategies that reduce wealth, and layer on top of that the reduction in wealth from the mechanical payment of the tax,” said Greg Leiserson, chief economist at the Washington Center for Equitable Growth. “Both of those will lead to potentially dramatic reductions in wealth at the top of the distribution.”
There’s a lot that isn’t known about how a high wealth tax would affect rich families and the broader economy. The experience with wealth taxes overseas, including in Denmark and Switzerland, was at rates considerably lower than those now being debated in the United States.