The Coming Era of Wealth Taxation

by Gar Alperovitz

Dollars and Sense magazine, July/August 2004

Americans concerned with inequality commonly point to huge disparities in the distribution of income, but the ownership of wealth is far, far more concentrated. This fact is certain to bring the question of wealth taxation to the top of the nation's political agenda as the country's fiscal crisis deepens and, with it, the deterioration of public institutions and the pain of all those who rely on them.

Broadly, in any one year the top 20% garners for itself roughly 50% of all income, while the bottom 80% must make due with the rest. The top 1% regularly takes home more income than the bottom 100 million Americans combined.

When it comes to wealth, these numbers appear almost egalitarian. The richest 1% of households owns half of all outstanding stock, financial securities, trust equity, and business equity! A mere 5% at the very top owns more than two-thirds of the wealth in America's gigantic corporate economy, known as financial wealth-mainly stocks and bonds.

This is a medieval concentration of economic power. The only real question is when its scale and implications will surface as a powerful political issue. A wealth tax is "by definition, the most progressive way to raise revenue, since it hits only the very pinnacle of the income distribution," notes economist Robert Kuttner. But conventional wisdom says that it is impossible to deal with wealth head-on. The battle over repeal of the estate tax, in this view, demonstrated that even the most traditional of "wealth taxes" are no longer politically feasible.

Perhaps. However, a longer perspective reminds us that times can change-as, indeed, they often have when economic circumstances demanded it.

EMERGING SIGNS OF CHANGE

Indeed, times are already beginning to change. One sign: Although many Democrats were nervous about challenging George W. Bush in the first year after he took office, by early 2004 all the Democrats running for president had come to demand a repeal in some form of his tax giveaways to the elite.

It is instructive to trace the process of change. At the outset, only a few liberals challenged the president. The late Paul Welistone, for instance, proposed freezing future income tax reductions for the top 1% and retaining the corporate Alternative Minimum Tax (AMT), for an estimated $134 billion in additional revenue over 10 years. Ted Kennedy proposed delaying tax cuts for families with incomes over $130,000 and keeping the estate tax (while gradually raising the value of exempted estates from a then-current $1 million to $4 million by 2010). Kennedy estimated this would generate $350 billion over 10 years.

By May 2002, even centrist Democrat Joseph Lieberman urged postponing both the full repeal of the estate tax and reductions in the top income-tax rates. Lieberman estimated his plan would save a trillion dollars over 20 years. The Bush tax cuts were simply unfair, he said, "giving the biggest benefit to those who needed it the least."

The Democrats failed to stop Bush's 2001 and 2003 rounds of tax cuts. But there are reasons to believe that politicians will ultimately come to accept the validity of maintaining and raising taxes on the wealthiest Americans. Just as many Democrats changed their stand on the Bush tax cuts, a similar progression is likely with regard to wealth taxation more generally over the next few years and for two very good reasons. First, there is an extraordinary fiscal crisis brewing; and second, wealth taxes-like taxes on very high-income recipients-put 95% to 98% of the people on one side of the line and only 2% to 5% or so on the other.

GO WHERE THE MONEY IS

The hard truth is that it is now all but impossible to significantly raise taxes on the middle class. This reality flows in part from the ongoing decline of organized labor's political power, and in part from the Republicans' takeover of the South-another long and unpleasant political story. At any rate, it means that the only place to look for significant resources is where the remaining real money is-in the holdings of corporations and the elites who overwhelmingly own them. Put another way: Raising taxes first on the income and ultimately on the wealth of the very top groups is likely to become all but inevitable as, over time, it becomes clear that there is no way to get much more in taxes from the middleclass suburbs.

Moreover, as Democratic politicians have come increasingly to realize, the "logic of small versus large numbers" could potentially neutralize a good part of the suburbs politically, painting conservatives into a corner where they're forced to defend the very unreasonable privileges of the very rich.

The knee-jerk reaction that taxing wealth is impossible is based upon the kind of thinking about politics that "remembers the future"-in other words, thinking that assumes the future is likely to be just like the past, whether accurately remembered or not. Since wealth has not been taxed, it cannot be taxed now, goes the argument (or rather, assumption).

Of course, taxation of wealth has long been central to the American tax system for the kind of wealth most Americans own-their homes. Real estate taxes, moreover, are based on the market value of the home-not the value of a homeowner's equity: An owner of a $200,000 home will be taxed on the full value of the asset, even if her actual ownership position, with a mortgage debt of, say, $190,000, is only a small fraction of this amount. A new, more equitable form of wealth taxation would simply extend this very well established tradition and-at long last!-bring the elites who own most of the nation's financial wealth into the picture.

Many Americans once thought it impossible to tax even income-until the 1913 passage, after long debate and political agitation, of the 16th Amendment to the U.S. Constitution. Note, however, that for many years, the amendment in practice meant targeting elites: Significant income taxation was largely restricted to roughly the top 2% to 4% until World War II.

Even more important is a rarely discussed truth at the heart of the modern history of taxation. For a very long time now the federal income tax has, in fact, targeted elites-even in the Bush era, and even in a society preoccupied with terrorism and war. In 2000, the top 1% of households paid 36.5% of federal income taxes. The top 5% paid 56.2%. Although detailed calculations are not yet available, the massive Bush tax cuts are not expected to alter the order of magnitude of these figures. Estimates suggest that, ultimately, the tax reductions may modify the figures by no more than two or perhaps three percentage points.

In significant part this results from the rapidly growing incomes of the wealthiest: even at lower rates, they'll still be paying nearly the same share of total income tax. The simple fact is, however, that the record demonstrates it is not impossible to target elites. We need to take this political point seriously and act on it aggressively in the coming period.

FISCAL CRUNCH AHEAD

What makes wealth taxes even more likely in the coming period is the extraordinary dimension of the fiscal crisis, which will force government at all levels to adopt new strategies for producing additional resources. Projections for the coming decade alone suggest a combined federal fiscal deficit of more than $5 trillion-$7.S trillion if Social Security Trust Fund reserves are left aside.

A worsening fiscal squeeze is coming-and it is not likely to be reversed any time soon. Critically, spending on Social Security benefits and Medicare will continue to rise as the baby-boom generation retires. So will spending on Medicaid. Recent studies project that by 2080 these three programs alone will consume a larger share of GDP than all of the money the federal government collects in taxes. And, of course, the ongoing occupation of Iraq will continue to demand large-scale financial support.

Nor are the trends likely to be altered without dramatic change: The truth is that the Bush tax and spending strategies, though particularly egregious, are by no means unique. Long before the Bush-era reductions, domestic discretionary spending by the federal government was trending down from 4.7% of GDP a quarter century ago to 3.5% now, a drop during this period alone of roughly 25%.

A radically new context is thus taking shape which will force very difficult choices. Either there will be no solution to many of the nation's problems, or politicians and the public will have to try something new. Suburban middle-class voters, who rely on good schools, affordable health care, assistance for elderly parents, and public infrastructure of all kinds, will begin to feel the effects if the "beast" of government is truly starved. This pain is likely to redirect their politics back toward support for a strong public sector-one which is underwritten by taxes on the wealthiest. Quite simply, it is the only place to go.

TIME TO TAX WEALTH

Ideological conservatives like to argue that all Americans want to get rich and so oppose higher taxes on the upper-income groups they hope to join. In his recent history of taxation, New York Times reporter Steven Weisman has shown that this may or may not be so in normal times, but that when social and economic pain increase, politicians and the public have repeatedly moved to tax those who can afford it most. Bill Clinton, for one, raised rates on the top groups when necessity dictated. So did the current president's father! Now, several states-including even conservative Virginia have seen pragmatic Republicans take the lead in proposing new elite taxation as the local fiscal crisis has deepened.

The likelihood of a political shift on this issue is also suggested by the growing number of people who have proposed direct wealth taxation. A large group of multimillionaires has launched a campaign opposing elimination of taxes on inherited wealth-paid only by the top 2%-as "bad for our democracy, our economy, and our society." Yale law professors Bruce Ackerman and Anne Alstott in their book The Stakeholder Society have proposed an annual 2% wealth tax (after exempting the first $80,000). Colgate economist Thomas Michl has urged a net-worth tax, and Hofstra law professor Leon Friedman has proposed a 1% tax on wealth owned by the top 1%. Even Donald Trump has proposed a one time 14.25% net-worth tax on Americans with more than $10 million in assets.

Wealth taxation is common in Europe. Most European wealth taxes have an exemption for low and moderate levels of wealth (especially the value of pensions and annuities). Economist Edward Wolff, who has studied these precedents carefully, suggests that America might begin with a wealth tax based on the very modest Swiss effort, with marginal rates between 0.05% and 0.3% after exempting roughly the first $100,000 of assets for married couples. He estimates that if this were done, only millionaires would pay an additional 1% or more of their income in taxes.

Europe also offers examples of much more aggressive approaches. Wealth taxation rates in 10 other European countries are much higher than Switzerland's-between 1% and 3% and would yield considerable revenues if applied here. Wolff calculated that a 3% Swedish-style wealth tax in the United States would have produced $545 billion in revenue in 1998. Although an updated estimate is not available, nominal GDP increased about 19% between 1998 and 2002, and wealth taxes would likely produce revenues that roughly tracked that increase.

Some writers have held that wealth taxes are prohibited by the U.S. Constitution. There appear to be two answers to this. The first is legal: Ackerman, a noted constitutional expert, has argued at length in the Columbia Law Review that wealth taxes are not only constitutional, but represent the heart of both original and contemporary legal doctrine on taxation.

The second answer is political. We know that courts have a way of bending to the winds of political-economic reality over time. As the pain deepens, the courts are likely one day to recognize the validity of the legal arguments in favor of wealth taxation. Alternatively, political pressure may ultimately mandate further constitutional change, just as it did in 1913 with regard to income taxation.

There is no way of knowing for sure. But as with all important political change, the real answer will be found only if and when pressure builds up both intellectually and politically for a new course of action. The challenge, as always, is not simply to propose, but to act.

Gar Alperovitz is professor of political economy at the University of Maryland and president of the National Center for Economic and Security Alternatives. He is the author most recently of America Beyond Capitalism: Reclaiming Our Wealth, Our Liberty, and Our Democracy (John Wiley & Sons, 2004).

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