Sanders’s and Warren’s Wealth Taxes Aren’t Going to Just Cost the Super-Rich

I had been planning on writing about Elizabeth Warren’s tax-a-mega-millionaire program (actually, an annual 2% tax on net worths above $50 million and an additional 1% on amounts above $1 billion), but Bernie Sanders has come along with a bigger (and better-?) tax of his own.  Senator Sanders’s plan needs a chart (as with Senator Warren’s tax, Senator Sanders’s tax is assessed annually):

1% tax on wealth above $32 million;
2% tax on wealth between $50 to $250 million;
3% tax from $250 to $500 million;
4% tax from $500 million to $1 billion;
5% tax from $1 to $2.5 billion;
6% tax from $2.5 to $5 billion;
7% tax from $5 to $10 billion; and
8% tax above $10 billion.

Senator Warren claims her plan would raise $2.75 trillion over a decade.  Senator Sanders claims his would raise $4.35 trillion.  Of course, both numbers are inflated because they fail to take into account the incredible intelligence and resourcefulness of American tax lawyers and accountants.  Loopholes will be found.  Tax avoidance techniques will be developed.  And actual tax collections will be less than predicted.

Also, regardless of what Senators Sanders and Warren may claim, their new wealth tax is not going to only affect the “super-rich.”  It’s going to affect almost all of us.  In saying this, I am not talking about the possibility (probability-?) that, with tax levels like this, people won’t invest or they will invest overseas instead of in the United States.  I think that is likely to happen, but that’s not what I am talking about here.

Rather, I am talking about what such a tax would do to the value of investments that people have even if they are not rich, like the stocks and mutual funds in their 401(k)s.  Let me explain.

Once the wealth tax is passed, when it comes time each year for the super-rich to pay the taxes they owe, they are going to have to come up with the money to do so.  Most of them are not going to have enough cash laying around, so they will have to sell some of their assets, which in many cases will be stocks or bonds.  When these forced sales happen, there will probably be more people trying to sell than people interested in buying – at least until the price comes down (that’s what happens when a lot of people have to sell, all at one time).

While that is a problem for the super-rich, it’s a problem for the rest of us, too.  Because the lower prices that result from the super-rich having to unload stocks, etc., in order to pay their wealth taxes, will be reflected in the lower values those stocks and mutual funds will now have in the 401(k)s of regular working people.  A person whose 401(k) used to be worth $300,000, may find that, with stock and mutual fund prices lower because of all the forced sales that occurred to pay Bernie and Liz’s wealth tax, their 401(k) is now only worth $250,000.¹

And the effect won’t be just on our 401(k)s.  It may also increase our state and local taxes, too.  When stocks and mutual funds go down in price, the value of the investments that state and municipal pension funds hold will go down, too.  Which means more money is going to have to be put into those pension funds in the future to fund the pensions.²  Which means higher taxes – or less spent on other things.

In summary:  First, while the Warren and Sanders tax-the-super-rich plans will force the super-rich to pay more in taxes, they won’t collect the amounts the senators are promising because the super-rich can afford the best tax lawyers and accountants to game the system.  Second, these new wealth taxes will reduce the values of the stocks and mutual funds in the 401(k)s that middle class workers are using to fund their retirement.  Third, by reducing the value of the investments in public employee pension funds, they will force up state and local taxes as states and municipalities struggle to fund their pension promises.

Wealth taxes may sound good in a campaign.  But if they are enacted, the effects won’t match the promises.
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¹ These reduced values will also mean that the wealth tax collections will be less the next year – because their wealth is down.
² Except, of course, in Illinois.  Because we don’t fund our pensions in Illinois.  Properly funding pensions is for mere mortals.  Our politicians are above that.