Democrats Want to Tax the Rich. Here’s How Those Plans Would Work (or Not).

Among Democratic presidential candidates, it’s the rallying cry of the moment — tax the rich. The idea is a centerpiece of the campaigns of Senator Elizabeth Warren and Senator Bernie Sanders. A former candidate, Mayor Bill de Blasio of New York, went so far as to say the government ought to “tax the hell out of the wealthy.”

The new taxes would fund a laundry list of liberal proposals — “Medicare for all,” free college, combating global warming and rebuilding roads and bridges.

But these measures will face fierce opposition, including from wealthy donors. Republicans in Congress are sure to oppose new taxes, making passage impossible unless Democrats take both houses of Congress in 2020. Whatever their political fate, these proposals represent the broadest rethinking of tax policy in decades.

“We seem to go back and forth between Democrats and Republicans on taxing the rich, depending on who is in power,” said Eric Toder, co-director of the Tax Policy Center. “But the Democrats now are a good deal more aggressive than they’ve been in the past.”

Four ideas have gained the most traction: a tax on wealth, raising marginal tax rates, expanding the estate tax and changing how the government taxes capital gains.

Creating a Wealth Tax

How many people would pay?

Relatively few.

Would it reduce inequality?

Almost certainly.

How much money could it raise for the government?

A lot.

Would the rich find ways to avoid or evade this tax?

Probably.

In January, Ms. Warren took a bold new approach by proposing to tax wealth, not just income. Her proposal would impose a 2 percent tax on assets above $50 million, or the top 70,000 families by wealth, in a nation of nearly 330 million people. Someone with $100 million in assets would pay $1 million a year. Fortunes over $1 billion would be subject to an additional 1 percent surcharge.

The tax, akin to how property taxes work, would be aimed at a group that controls a growing portion of the nation’s wealth. The 400 richest Americans own 3.5 percent of the country’s assets, according to Emmanuel Saez and Gabriel Zucman, economists at the University of California, Berkeley, who have advised Ms. Warren. Over time, her tax would reduce that to 2 percent, according to Mr. Saez and Mr. Zucman. If it had been in place since 1982, the fortune of Jeff Bezos, the Amazon founder, would now be $87 billion, rather than $160 billion, they estimate, using figures from before his divorce.

Ms. Warren’s proposal would bring in $2.6 trillion over 10 years, according to Mr. Saez and Mr. Zucman. At $260 billion a year, that is a small share of total annual federal spending of $4.4 trillion. Lawrence Summers, a former Treasury secretary, and Natasha Sarin, a law professor at the University of Pennsylvania, have disputed earlier estimates by the two economists as overly optimistic.

Share of household wealth held by:

Source: Thomas Piketty, Emmanuel Saez and Gabriel Zucman, “Distributional National Accounts: Methods and Estimates for the United States”

On Tuesday Mr. Sanders is proposing his own wealth tax, one that goes after mega-wealth even more aggressively than Ms. Warren’s proposal. His graduated tax would start at 1 percent for assets of more than $32 million, climbing to 8 percent for wealth exceeding $10 billion. The tax would raise an estimated $4.35 trillion over a decade.

As appealing as a wealth tax might sound for the party’s liberal base, enacting it would pose major challenges. Anyone lucky enough to be in its sights has access to top tax lawyers and accountants who can sift through the tax code for a way out, or at least a means of minimizing the hit.

European countries have had mixed success with wealth taxes. Weak enforcement and offshore havens have enabled many individuals to greatly reduce what they owe. The Internal Revenue Service would need detailed reports from banks, brokerage firms and other financial institutions to make the tax effective.

“It could raise a lot of money but probably less than Elizabeth Warren thinks,” Mr. Toder said.

Raising top income tax rates

How many people would pay?

Not many.

Would it reduce inequality?

Probably.

How much money could it raise for the government?

A modest amount.

Would the rich find ways to avoid or evade this tax?

Yes.

Raising the top income tax rate is one of the most straightforward ways to tax the rich and some prominent Democrats have embraced it. For example, Representative Alexandria Ocasio-Cortez of New York City has said that the government should impose a 70 percent tax on earnings above $10 million.

While that might sound radical, it would actually represent a return to tax policies that prevailed for decades. The top income tax rate stood at 70 percent as recently as 1980, and was even higher before then, topping 90 percent in the late 1950s and early 1960s.

Highest marginal tax rate

Source: Tax Policy Center

In terms of inequality, it would effectively reduce some of the extremes in pay that have developed in recent decades. The vast fortunes accumulated by a few dozen billionaires have also made new taxes more politically palatable. For example, Ms. Ocasio-Cortez’s 70 percent tax would be paid by about 21,000 taxpayers.

Over 10 years, her proposal would raise up to $382 billion, according to the Penn Wharton Budget Model. That is about half as much as the government will spend on the Defense Department this fiscal year.

With the help of accountants and lawyers, the wealthy would no doubt try to find ways to convert earned income into capital gains or business income, which are currently taxed at lower rates.

Raising the estate tax

How many people would pay?

Not many.

Would it reduce inequality?

A lot.

How much money could it raise for the government?

A modest amount.

Would the rich find ways to avoid or evade this tax?

Most likely.

Experts say inherited wealth is an important driver of inequality. The estate tax is meant to combat that, but in recent decades lawmakers have made it easier for taxpayers to avoid it. Mr. Sanders wants to change that.

Under his proposal, the estate tax rate would begin at 45 percent for assets worth more than $3.5 million and rise to 77 percent for those with more than $1 billion. The proposal would apply to just 0.2 percent of the population, according to Mr. Sanders.

The senator’s plan would raise $315 billion over 10 years, or less than half of military spending this year. But the higher tax on estates worth more than $1 billion could raise $2.2 trillion over the long term. Mr. Sanders has said he wants the money to pay for his ambitious agenda of social programs.

Estate tax exemption

*In 2010, the estate tax was repealed for one year.

*In 2010, the estate tax was repealed for one year.

*In 2010, the estate tax was repealed for one year.

Source: Tax Policy Center

Ms. Warren has also proposed expanding the estate tax as part of a housing bill. The estate tax would start at 55 percent and rise to 75 percent. She has said that the tax would affect 14,000 wealthy families a year.

Lawyers and accountants have devised many strategies for avoiding the estate tax, said Kyle Pomerleau, chief economist at the Tax Foundation. Of course, if Congress were to adopt Mr. Sanders’s proposal, lawmakers could also try to close some of those loopholes.

Raising capital gains tax rates

How many people would pay?

Relatively few taxpayers.

Would it reduce inequality?

Most likely.

How much money could it raise for the government?

A lot.

Would the rich find ways to avoid or evade this tax?

Possibly.

Several Democrats, including former Vice President Joe Biden, want to end the discrepancy between how different kinds of income are taxed. To wit, long-term capital gains are taxed at a top rate of 20 percent, but the top rate for salary and wage income is 37 percent.

Lower taxes on investment income skew the system in favor of wealthier households and raising capital gains tax rates would change that.

As of 2016, about 80 percent of the income of households that earn less than $198,000 a year comes in the form of wages and salaries, according to a paper by Lily Batchelder and David Kamin of the New York University School of Law. By contrast, capital gains and dividends account for 70 percent of the income of the families that earn $53 million or more a year.

“The way that the very top of earners in our country make money is very different from the rest,” Mr. Kamin said.

Sources of income by income group

Long term capital gains and qualified dividends

Long term capital gains and qualified dividends

Long term capital gains and qualified dividends

Long term capital gains and qualified dividends

Long term capital gains and qualified dividends

Long term capital gains and qualified dividends

Source: Lily Batchelder and David Kamin, New York University School of Law

The top 10 percent of households by income own 84 percent of all stocks. Mr. Biden’s plan is aimed at this group and would raise the capital gains rate to 39.6 percent for top earners.

Senator Ron Wyden of Oregon, who is not running for president, would go further still by fundamentally changing how capital gains are taxed, at least for the wealthiest Americans. He recently proposed taxing the appreciation of stocks held by the richest 0.3 percent of households, even if those gains haven’t been realized. Mr. Wyden also favors equalizing the rate at which earned income and capital gains are taxed.

The senator’s proposal would have the effect of trimming the wings of billionaires who have watched their fortunes soar but haven’t sold their shares.

The proposal from Mr. Wyden would raise an estimated $1.5 trillion to $2 trillion over 10 years, which would be earmarked for Social Security. Mr. Biden would allocate money raised in part from hiking capital gains taxes to pay the $750 billion cost of expanding coverage under the Affordable Care Act.

Simply raising capital gains taxes without other reforms is tricky as taxpayers could choose not to sell stocks to avoid owing money. Based on research it has analyzed, the Tax Policy Center estimates that raising the capital gains rate above 30 percent would reduce revenues, Mr. Toder said. Taxing appreciation as Mr. Wyden has proposed would help address this.

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