For decades, old brownstones in my hometown of Boston were sold off and carved up into individual units. Today, apartment-dwellers are being evicted as these same buildings are being purchased for millions of dollars so the ultra-rich can turn them back into single-family homes.
It is not surprising, then, that the senator Elizabeth Warren of Massachusetts would make inequality and a wealth tax central to her presidential campaign. The economic problem is that whatever your moral views on soaking the rich, history shows wealth taxes do not usually work.
Ms Warren and Bernie Sanders, her rival for the Democratic presidential nomination, each advocate wealth taxes. Ms Warren aims to levy a 2 per cent tax on assets above $50m and up to 6 per cent on billionaires. Mr Sanders wants rates of 1 to 8 per cent on wealth above $32m.
They have two objectives: one is to increase tax revenues to pay for universal healthcare, climate change initiatives and the elimination of student debt. The other is to reduce inequality: over the past 40 years, the share of the country’s wealth held by the top 0.1 per cent of Americans more than doubled to 20 per cent.
But the history of such taxes shows they come up short on both counts. About a dozen OECD countries have tried them. They did not raise much money: as little as 0.2 per cent of gross domestic product a year. Only four still have them. Norway and Spain raise less than 0.5 per cent of gross domestic product, while Switzerland raises twice that. Belgium just last year introduced a wealth tax on some securities.
The extra revenue is often offset by administrative costs. Valuing the possessions of the super-rich is difficult. Gabriel Zucman and Emmanuel Saez, advisers to Ms Warren, argue that 70 to 80 per cent of the wealth of the 0.001 per cent is in listed securities that trade daily and have a clear, market-based value. But, as investors know, these prices can fluctuate significantly. Valuing the other assets — racehorses, artwork and houses — is much more difficult and can take years as auditors and tax authorities disagree. When Austria abolished its wealth tax in 1994, officials cited the administrative costs.
Wealth taxes also create incentives for avoidance and evasion by people moving assets abroad, where they are harder — and more expensive — to find. The French government estimated that 10,000 people with €35bn in assets left the country for tax reasons between 2002 and 2017, when France scrapped its wealth tax in favour of a levy on real estate. Such departures also reduce revenues from income and sales taxes.
It may be harder to avoid an American wealth tax. The US already taxes worldwide income and the Foreign Account Tax Compliance Act requires citizens to report annually on assets held abroad. However, the US also specialises in advisers adept at reducing, delaying and avoiding tax payments.
Proponents of wealth taxes insist that there will be no exemptions, but they may not have reckoned with the lobbying power of the ultra-rich. If some asset classes are given more favourable treatment, expect billionaires to pour money into them, causing price distortions, inefficient allocation of capital and shrinkage of the tax base. Worse, such taxes are administered on wealth minus debt, which provides a motive for the super-rich to rack up debt to buy exempted assets.
The case for using a wealth tax to reduce inequality is also problematic. The German research institution Ifo argues that even though they are paid by the very wealthy, “the burden is carried by virtually everyone”. They make economies less competitive and dynamic. That’s because the very rich do not generally park their fortunes in bank vaults — the lion’s share is used for business activities that generate jobs and income. Whittling away wealth can reduce investment, and with it productivity, wages and potential growth.
Many billionaires invest in illiquid assets such as land or private companies. Forced sales to pay wealth taxes could create price distortions, and particularly hurt private companies.
Finally, some legal scholars argue that a US wealth tax might contravene a constitutional clause requiring direct taxes to be proportional to state population. Income taxes are exempt from this rule but it is not clear that is true for wealth taxes.
Inequality has become a central issue in politics worldwide. It’s brought us populism, Brexit and expensive remodelled brownstones in Boston. Wealth taxes are not the right tool to address it.
The writer is a senior fellow at Harvard Kennedy School