Is the United States becoming more unequal? According to data from researchers at the University of Oxford, income inequality in the U.S. has steadily been rising, and in 2018 the gap between the top 10 percent of earners and the bottom 10 percent reached its widest margin since the Great Depression.
As the 2020 presidential cycle kicks off, several candidates have signaled they plan to tackle income inequality. Sen. Elizabeth Warren proposed a “wealth tax” on households with assets of $50 million and more last month. If passed, Warren’s tax could raise $2.3 trillion over a decade, and fund many of the social programs she’s campaigning on, such as universal healthcare — which would require an initial down payment of $1.1 trillion.
Warren’s tax, which is the brainchild of University of California, Berkeley economists Emmanuel Saez and Gabriel Zucman, would impose an annual 2 percent tax on households worth more than $50 million and a 3 percent tax on ones worth more than $1 billion, overall impacting an estimated 75,000 households. According to Jonathan Gruber, the Ford Professor of Economics at MIT and the architect behind the Affordable Care Act, Warren’s proposal could be a powerful tool to grow the economy if implemented properly.
“If it came in the way she proposed it, I think it would be a good piece of public policy to raise a lot of money. I don’t think it’d deter wealth accumulation at all,” Gruber said. “There’s a lot of economic evidence that [we] will raise money if we tax the rich more heavily, and we won’t lower economic growth.”
Warren’s proposal has earned her plaudits from many progressive activists, along with economist Thomas Piketty, who said it was one of the most innovative methods to fight inequality in the US he’s seen so far. For all of the praise, Warren has also attracted a fair amount of criticism from some who see it as implausible or an overreach of government. Former Starbucks CEO Howard Schultz called the plan “ridiculous,” while former New York Mayor Michael Bloomberg said it would turn the US into Venezuela — as billionaires, both men would also be subject to the tax. Gruber dismissed both criticisms, but said the plan’s Achilles heel will be in how many loopholes the tax allows for people to exploit.
“What do we know from decades of economic research? If you tax the rich more, they’re not going to work less hard — the so called 'Laffer Effect' is not real,” Gruber said. “But they will work like hell to avoid those taxes.”
Others contend Warren’s tax will stymie economic growth and innovation, but Gruber says the historic record says differently. Nobel Prize winning economists Paul Krugman and Lawrence Klein, along with the conservative leaning Mercatus Institute, corroborate Gruber’s view that one of the highest periods of economic growth, employment and income equality, all occurred in an economy where the top marginal tax rate for high income earners hovered between 50-91 percent and the corporate tax rate between 48 and 52 percent.
“The period of high tax rates was also a period of massive government investment in research and development, and that led to innovation and growth in America,” Gruber said. “Basically, if we can take some of these higher taxes on the rich and recycle them into increased investment in growing our economy, and through government research and development, that would net increase the economy and not shrink it.”
Some, however, say Warren’s proposal to tax wealth is simply unconstitutional. They point to a section in Article I of the Constitution which bars Congress from imposing a “direct” tax unless it is equally apportioned among the population, as opposed to indirect ones like income taxes, which are taxing actions. Critics of a wealth tax have frequently pointed to the 1895 Supreme Court decision in Pollock v Farmers’ Loan & Trust Co., where the court ruled that a tax on income derived from property is a direct tax, and thus unconstitutional. Scholars since then have taken grievance to the application of the Pollock decision in modern jurisprudence. In 1999, Yale Law School professor Bruce Ackerman authored a 1999 article arguing that New Deal legislation, which went unchallenged, created a precedent for allowing new forms of taxation, while conceding the Pollock decision has never officially been overturned by the Court. More recently, Indiana University Maurer School of Law professor Dawn Johnsen penned a paper last year arguing a wealth tax is constitutional, and says the decision has been reversed by a century of legislation, which has been tacitly approved by the Supreme Court.
“Senator Warren’s proposed tax on wealth is constitutional,” Johnsen said. “The only reason there’s any question about that is about a century ago, a sharply divided Supreme Court issued a series of deeply flawed decisions that we now recognize as terribly wrong. These reactionary decisions improperly limited Congress’s power to tax and also struck down child labor protections, minimum wages, and other workplace protections and other economic regulations now recognized as within Congress' power.”
Constitutional debates aside, the biggest obstacle facing Warren’s proposal will be getting it through a Republican controlled Senate, and then surviving an inevitable challenge in a conservative-leaning Supreme Court.
“Although you can make a plausible case that it could be Constitutional, whether or not this kind of tax would pass muster depends entirely on the politics of the Supreme Court,” Michele Dauber, a professor at Stanford Law School said. “Given the current right-wing political climate in the federal courts, particularly the Supreme Court, I think that there are other ways to increase taxes on the wealthy besides Warren's proposal which would be more certain to survive a challenge — something she surely knows.”
Even with these challenges, Warren’s proposal seems to have the stamp of approval of the public — a Politico/Morning Consult Poll said 61 percent of voters and 50 percent of Republican voters approve of the wealth tax — and could be enough to lift her to the White House, where, coupled with a Democratic controlled House, she may be in a better position to negotiate with the Senate.
