Warren vs. Ocasio-Cortez TAXDOME 2020 – Two tax proposals enter, only one leaves

Senator Elizabeth Warren has proposed a new tax on wealth rather than income. The proposal states that there would be a 2% tax on assets greater $50 million and a 3% tax on assets greater than $1 billion. Earlier this month we heard about the tax proposal from representative Alexandra Ocasio-Cortez(AOC), which was a marginal tax on income, rather than wealth. Now that we have a couple of left leaning tax proposals, we can evaluate them.

Part of Warren’s proposal no doubt has some “stage setting” impetus behind it, in that she is trying to shepherd in the progressive flock of the democrats for the 2020 election. On the other had, she understands that there is a very real movement within the left for progressive tax policies, for something, ANYTHING that can be done to specifically target economic inequality which the left feels is antithetical to democratic core values.

Warren isn’t doing this on her own however, as she has some serious academic weight driving her proposal. Emmanuel Saez, of Piketty and Saez who together wrote Capital in the 21st Century, advised Warren on the proposal. Saez has been a leading researcher on tax, income distribution, and economic policy for almost two decades. Much of the focus of his research has been the 0.1% of society, which Warren’s proposal intends to address.

So, the democrats are manifestly addressing the issue of economic inequality in a real, concrete way – something that Clinton didn’t address and it cost her in 2016. The question now is: Which of these proposals will most effectively remedy the enormous chasm that has developed in the last couple of decades?

Source

In Piketty and Saez’s book, their main argument is that when the return to capital is greater than economic growth for the general economy, concentration of wealth occurs; simply r>g. For instance, let’s say that a wealthy person can earn 8% return over one year by lending, investing in business, or purchasing stock. If the national economy, measured by GDP, only grew by 3%, the capital will further concentrate into the hands of the owners of capital. By contrast, when r>g the returns to labor, or labor’s share of national income go down relative to the returns to capital. The chart above shows this dramatic shift occurring around 1980, when a lot of the concentration-mitigating laws and regulations were rolled back with respect to banking and finance.

Both proposals are trying to structure the tax system to represent the pre-1980 wealth landscape, where the returns to labor comprised a larger share of the growth of the economy. How these proposals intend to accomplish this is a bit like trying to lose weight. Let me explain.

My goal is to lose 10 lbs. To achieve my goal, there are two basic routes:

  • Reducing the number of calories you take in, like not having that other half of an entire box of chocolate that someone brought for everyone to share , JANET! Or,
  • Doing more than just “getting my steps in” and actually committing to getting your heart rate up and exercising

For most people trying to lose weight, it is likely a combination of these two that will produce results, though any one of those, if done enough, will work as well. AOC’s proposal is like limiting the number of calories a person takes in. Her marginal tax rate plan, which would tax a person’s income progressively higher the more they earned, seeks to prevent extreme accumulation in the first place. For instance, AOC’s plan would tax income over $10 million dollars a year at 70%. Importantly, this doesn’t mean that all $10 million is taxed at 70%. Rather, it may mean that from $500,000 – $1,000,000 tax would be 34%, $1ml – $5ml taxed at 54%, $5ml -$10ml at 65%, and then above that at 70%. I want to be clear that I haven’t read the proposal in detail and have completely made these ranges up, but I wanted to illustrate what a marginal rate was.

Warren’s proposal comes at this from the opposite end, drawing from the work of Saez. Her proposal basically says, yes I did in fact eat that whole box of chocolate that was clearly for everyone at the office to share, but I did it anyway because I didn’t think anyone would notice. Now, what am I going to do about it? After the income is earned, there would be a wealth tax of 2% for an individual whose net worth was above $50 million, and 3% above a billion.

At the risk of sounding like a centrist, I think there should be a more comprehensive approach which incorporates both proposals, though I would weight them with a 70-30 split in favor of Warren. AOC has said that the proceeds from her proposal would fund a green new deal, which I think lends it power since it is planned for something specific. On the other hand, taxing income is harder for Americans to swallow, as it is viewed by many on the right and some on the left as a penalty on productivity. What is easier to sell, is the taxation of the billionaire trust fund baby who creates no jobs, produces nothing, and simply lives on capital rent.

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