At the December Democratic debate, when asked to comment regarding several dire economic forecasts evaluating her proposed wealth tax on the economy, Senator Warren responded: “oh – they’re just wrong.” That response elicited applause from the audience and zero follow-up questions. Shame on both the audience and the moderators. Just glib is not good enough.
In an 1819 Supreme Court Case, the Supreme Court (McCollough v Maryland) correctly noted that “the power to tax is the power to destroy.” While this case was directed at taxes imposed by a state, it is a comment worth remembering.
Senator Warren’s wealth tax proposal is only one of several proposed tax increases on the wealthy and on U.S. corporations. Senator Warren has proposed each of the following taxes on the wealthy: (a) a wealth tax, (b) an increase in the capital gains tax, (c) an implementation of capital gains taxes on appreciation rather than upon sale of capital assets, and (d) an increase in the top ordinary income tax rate. She has also proposed dramatic increases in corporate income taxes on larger U.S. corporations.
There is no evidence that Senator Warren is proposing that Congress pick from a menu of her different tax plans. She has proposed each of these tax increases.
Virtually every economic analysis and modeling performed to date by academics has been done, stiletto like, with respect to the impact of a wealth tax on the economy. The Wharton study indicates that Senator Warren’s wealth tax will not generate the taxes promised. This study, while interesting, does not address either the total federal revenues or the combined economic impact from the totality of her proposals.
The question asked at the Democratic debate should not have been a focus solely on Senator Warren’s wealth tax; the question and focus should have been and should be with respect to the total economic impact of the tax proposals in her political quiver. How would the sum of her tax proposals impact the economy?
Let’s examine the impact of all of Senator Warren’s proposed individual tax increases on Jeffrey Bezos, assuming each of her proposals were law at January 1, 2019.
Some facts: (a) Mr. Bezos owns 57,551,200 shares of Amazon. It is assumed for this example that he owned the same number of shares at the beginning of 2019 and that his tax basis in his shares is close to zero, both very reasonable assumptions (b) The fair market value of his stock at 1/1/2019 was $88.7 billion and at 12/31/2019 was $106.5 billion
Senator Warren proposes to tax the appreciation of his Amazon stock (without a sale) with a new 58.2% federal tax rate resulting in a new tax for Mr. Bezos of $10.1 billion. Mr. Bezos’s wealth tax would be $6.3 billion. Neither the new capital gains tax nor the wealth tax is the result of any transaction and therefore Mr. Bezos would be forced to sell Amazon shares to pay his new Elizabeth Warren created taxes.
Mr. Bezos would be forced to sell $36.9 billion dollars of Amazon stock (35% of his holdings) and pay $20.2 billion dollars of federal income taxes on that sale to net the funds to pay the $10.1 billion of federal income taxes on his stock appreciation and the $6.3 billion of the wealth tax. (Note that if Mr. Bezos was a resident of California, his total tax bill would increase by many billions more; his state of residence, Washington, has no income tax. This should scare high tax states to death. How many additional tax dollars would cause a billionaire to move from New York or California to Washington, Florida or Texas?)
And the tax parade is annual. Every year, Mr. Bezos would be faced with selling a very significant percentage of his remaining holdings to pay his new federal taxes.
Putting $36.9 in taxes from a single individual in some perspective, Mr. Bezos would be paying an amount equal to the total state budgets of Delaware, Idaho, Montana, New Hampshire, South Dakota and Vermont combined plus $5.2 billion. Further perspective, if Amazon stock declined 20% because there were no buyers at the current price, those institutions and pension funds that have invested in Amazon would lose value equal to almost $200 billion.
Sometimes there are economic events where everyone loses – a sinking tide lowers all boats.
And what of the economy? Who would be the buyers of Amazon stock to the tune of $36.9 billion knowing that in the next year, Mr. Bezos would be selling another $12 billion of Amazon stock? And of course, virtually every billionaire would have their own Amazon stock to sell and few, if any billionaires would be purchasers of stock. Would stock prices collapse? Would America wake up in three years and find out that the sovereign wealth funds of several countries purchased a significant percentage of the country’s largest companies?
Senator Warren and Senator Sanders as well are running to become President of the United States. If elected, their decisions and ideas will be equally important as the decisions of each of their predecessors. With respect to every issue, debate moderators, rally organizers and the press cannot accept incomplete answers to important questions. Just glib is not good enough.