There are not 3.75 trillion reasons to love the Ultra-Millionaire Tax. In fact, any proposed “tax the rich scheme” would have minor impact on tax revenues or inequality. This conclusion comes from a new paper describing research conducted by Joseph Steinberg, a Professor of Economics with the University of Toronto, and his co-author Shahar Rotberg.
The research was inspired by an economic analysis of a popular taxation plan first put forward by Senator Elizabeth Warren’s during the Democratic Convention of 2016.
“The Ultra-Millionaire Tax taxes the wealth of the richest Americans. It applies only to households with a net worth of $50 million or more—roughly the wealthiest 75,000 households, or the top 0.1%,” Warren’s website explains. “Households would pay an annual 2% tax on every dollar of net worth above $50 million and a 6% tax on every dollar of net worth above $1 billion. Because wealth is so concentrated, this small tax on roughly 75,000 households will bring in $3.75 trillion in revenue over a ten-year period.”
While the initial analysis of Warren’s plan was conducted by respected economists at the University of California, Berkley, that research team did not consider the potential for increased tax evasion in its calculations. Steinberg and Rotberg knew this omission had to be addressed.
“Roughly 0.1% of the population are ultra-millionaires,” Steinberg said. “Now guess what proportion of the population have access to offshore accounts, whether in Switzerland or the Cayman Islands, or elsewhere, for tax avoidance? It’s the exact same fraction of the population. Offshore tax evasion is expensive. You have to pay transfer fees. You have to have an international tax lawyer on retainer all the time. This kind of tax evasion really is only available to the very wealthy.”
Steinberg and Rotberg conducted a series of mathematical experiments that put the potential for increased tax evasion back into the analysis of wealth tax proposals.
Steinberg describes the results of the experiments as “dismal.”
“At the moment, tax evasion is responsible for losses that amount to about a quarter of a percent of GDP,” he said. “When wealth taxes come into play, that figure could increase by as much as ten-fold. Consequently, these policies would generate essentially no new tax revenue at all.
Further, although these proposals would appear to reduce redistribute wealth from the ultra-rich to the rest of us, “most of this redistribution would be illusory.” A side effect of the increase in tax evasion would be a large reduction rich households’ onshore wealth. This would look like a reduction in wealth inequality in survey data, but it wouldn’t reflect what’s happening on the ground.
Steinberg and Rotberg found no scenarios where raising taxes on the ultra wealthy would materially improve public finances or inequality. However, there was a different kind of reform that would work.
“You can dedicate more resources toward enforcement and raise the penalties of getting caught evading taxes,” Steinberg said. “Canada, which is notorious for its lax treatment of international money laundering and opaque shell companies, would see particularly big gains from dedicating resources in that direction.”
Steinberg and Shahar’s results appear in the paper Tax Evasion and Capital Taxation recently accepted for publication in the Journal of Political Economy.
Return to the Department of Economics website.
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