Warren’s wealth tax may fall $1T short, study finds

Senator Elizabeth Warren, a Democrat from Massachusetts and 2020 presidential candidate, speaks during the Iowa Democratic Party Liberty & Justice Dinner in Des Moines, Iowa, U.S., on Friday, Nov. 1, 2019. The Democratic presidential field will descend on Des Moines today for the last big party gathering in the state, where in fewer than 100 days caucus-goers will have an outsize say in deciding who the partys nominee will be. Photographer: Daniel Acker/Bloomberg
Sen. Elizabeth Warren at a campaign event in Iowa in November

Senator Elizabeth Warren is overestimating the proceeds of her wealth tax by at least $1 trillion, according to a new study, raising questions about the Democratic presidential candidate’s plans to fund her sweeping proposals to reshape the U.S. economy.

Warren’s tax would raise $2.3 trillion to $2.7 trillion over a decade, far short of the $3.75 trillion her campaign has said the levy on the accumulated wealth of millionaires and billionaires would raise in that period, according to new estimates from the Penn Wharton Budget Model.

The estimate calls into question the Massachusetts senator’s frequent assertion that taxes on the wealthiest Americans would be sufficient to cover her plans for universal childcare, college tuition and erasing student debt, with about $1 trillion allocated toward paying for her $20.5 trillion Medicare for All health care plan.

Economists on the right and left have cautioned that she may be relying on overly generous estimates of her taxes and low-balling how much the new programs could cost.

Warren has dismissed any suggestion that she would need to raise taxes on the middle class to finance her proposals.

The key reason for the difference between Warren’s estimate and the one from the Penn Wharton Budget Model is that the authors of the new study have factored in what they believe is a likelihood that more people than Warren expects will avoid the tax, whether legally or illegally, said Kent Smetters, a professor of business economics and public policy at the University of Pennsylvania’s Wharton School.

The line between the kind of tax-reducing or tax-avoiding behaviors that will be allowed and those that could result in an IRS penalty -- or worse -- isn’t yet known, said Smetters, who is also the faculty director of the Penn Wharton Budget Model.

“There’s a lot of gray area of what is allowed. That won’t be known until the Tax Court rules on it,” he said.

Warren’s tax -- 2 percent on fortunes in excess of $50 million and 6% on wealth above $1 billion -- is one of her campaign’s mainstays. She says it’s needed to raise revenue for new social programs and to help reduce wealth inequality.

“This analysis does not study Elizabeth’s actual plans -- it does not account for the strong anti-evasion measures in her wealth tax and does not even attempt to analyze the specific investments Elizabeth is committed to making with the wealth tax revenue,” Saloni Sharma, a spokeswoman for Warren campaign, said Thursday in an email. “This is an analysis of a different and worse plan than Elizabeth’s, using unsupportable assumptions about how the economy works, and its conclusions are meaningless.”

Skeptics -- including some Democrats in Congress -- say the tax could be difficult to enforce, easy to avoid and could potentially face a constitutional challenge.

Warren developed the tax plan with the help of two economists at the University of California at Berkeley, Gabriel Zucman and Emmanuel Saez, who have studied wealth and income inequality. They say the $3.75 trillion figure is realistic if the Internal Revenue Service has a strong enforcement strategy and Congress doesn’t write any loopholes into the law.

Additionally, the study says the tax would shrink the economy between 0.9 percent and 2.1 percent by 2050, depending on how the revenue is spent. Investments, such as those in education or those that make the workforce more productive, could counteract some of the negative effects, the study added.

“An investment in early childhood education might lead to additional labor-market dynamics that boost the economy,” the Penn Wharton study said. At the same time, the authors said, “a considerable amount of wealth inequality in the United States has historically been driven by entrepreneurship, a factor that has received very little attention in tax models and analysis.”

The policies of a Warren administration would ultimately be scored by the nonpartisan Joint Committee on Taxation and the Congressional Budget Office, which estimate costs of legislation. Warren may have to adjust her expectations if she’s elected and the JCT and CBO are the final arbiters of her plan’s price tags, said Kyle Pomerleau, a resident fellow at the American Enterprise Institute said.

“I think she will find that the JCT is not as optimistic as Gabriel Zucman,” Pomerleau said.

-- Laura Davison, Bloomberg News

(Michael Bloomberg is also seeking the Democratic presidential nomination. Bloomberg is the founder and majority owner of Bloomberg LP, the parent company of Bloomberg News.)

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