The French Economist Who Helped Invent Elizabeth Warren’s Wealth Tax

To trace the progress of the wealth tax from a fringe academic idea to the center of the Democratic Presidential primary, it is helpful to begin a bit off-center. On September 15, 2008, the day that Lehman Brothers filed for bankruptcy, a twenty-one-year-old student of Thomas Piketty, Gabriel Zucman, started work as a trainee economic analyst in the offices of a Paris brokerage house called Exane. Zucman felt obviously underequipped for the task before him: to write memos to the brokerage house’s clients and traders helping to explain why the very durable and minutely engineered global financial system appeared to be on the verge of collapse. Poring over some of the data he was given, which concerned the international flows of investments, Zucman noticed some strange patterns. The amount of money that had been moving through a handful of very small economies (Luxembourg, the Cayman Islands, the tiny Channel Islands of Jersey and Guernsey) was staggering. “Hundreds of billions of dollars,” Zucman recalled recently, making the “B” in “billions” especially emphatic. Eventually, he would calculate that half of all foreign direct investment—half of the risk-seeking bets, placed from overseas in India, China, Brazil, and Silicon Valley, and of the safety-seeking investments, placed in the United States and Europe and stock indexes—was moving through offshore hubs like these.

Before the financial crisis, the rise of offshore tax havens hadn’t been ignored—one element of the Enron scandal of 2001, for instance, was the eight hundred and eighty-one overseas subsidiaries the company had created, which had helped it avoid paying federal taxes for three years—but those stories took place within a more confined and more frankly moral framework: it was a cat-and-mouse plot, about the mobility of wealth, and the fruitless efforts to pursue it. Zucman’s intuition was that these arrangements did not describe a moral or a legal drama but a macroeconomic one. That much wealth, poorly documented or regulated, might have helped to destabilize the global economy. It also seemed that, if economists were not attuned to the amount of wealth stored in offshore havens, they might also have missed the extent of global inequality, since it was billionaires who stored money in the Cayman Islands, not retirees. “You know, the way we study inequality is we use survey data, state-tax data,” Zucman told me, “and that’s not going to capture these Swiss bank accounts.” After half a year at Exane, Zucman was back in graduate school, working with Piketty on the study of wealth inequality in the United States and Europe that became Piketty’s landmark book, from 2013, “Capital in the Twenty-First Century,” as well as on his own fixation—on how big the island-shaped loopholes in the global economy would turn out to be.

For the next several years, Zucman followed two tracks. The first led deeper into the mists of offshore banking systems. In obscure monthly reports of the Swiss central bank he discovered that foreigners held $2.5 trillion in wealth there (Zucman would eventually calculate that $7.6 trillion, or eight per cent of global household wealth, was held in tax havens, three-quarters of it undeclared) and that these immense sums were mostly being diverted to mutual funds incorporated in Luxembourg, the Cayman Islands, and Ireland. The second track—the work he did first with Piketty and then with the Piketty collaborator and Berkeley economist Emmanuel Saez—mapped the acceleration of inequality around the world and in the United States. The American story was of a snowball effect, as Zucman described it, in which the very high top incomes of the nineteen-eighties and nineties were saved and invested, “and that creates a spiral which is potentially very powerful and leads to very, very high rates of wealth inequality.” The two stories were in fact one. The concentration of wealth in secretive tax havens was an expression of the broader wealth imbalance—the laissez-faire spirit of the Reagan era working its way through the country and then the world. “One thing that became clear in my mind when I did the study of the U.S. wealth inequality is how hard it is to stop the rise of wealth inequality if you don’t have progressive taxation and, in particular, progressive wealth taxation,” Zucman told me. Without it, the snowball just keeps growing.

This work took place during Obama’s Presidency, a period in which, a bit paradoxically, the global populist reaction to accumulated wealth was consolidating even as liberal institutions, belatedly, began to get a handle on the problem. In 2010, early in Zucman’s doctoral work, Congress had passed the Foreign Account Tax Compliance Act (fatca), which required tax havens to share banking information with the United States or suffer significant economic sanctions. The program worked, and, by the middle of the decade, European regulators had compelled tax havens to share the same information with them. “That actually had a very big impact on my thinking, because it showed that new forms of international coöperation can emerge very quickly,” Zucman told me. “In particular, sometimes we have this view that, ‘Oh, we can’t do anything about tax havens. Countries are entitled to their own laws, and, if they want to have a zero-per-cent corporate-tax rate of bank secrecy, that’s their own right.’ ” Bufatca had demonstrated that tax havens were not autonomous zones. “At the beginning of my Ph.D., whenever I or N.G.O.s would talk about having some automatic exchange of banking information, policymakers would say, ‘Oh, that’s a pipe dream.’ And so I witnessed the transition from pipe dream to now everybody does it.” He went on, “It can happen very fast.

As WikiLeaks oriented international relations around a central tension, between transparency and secrecy, similar themes and patterns were emerging in the area of wealth. To parse them required the tools of an investigative journalist, of discovery and cajoling. Zucman is an economist, but he also had some of the qualities—youth and fervency—that investigative reporters often have, and that made him someone people would go to when they thought something was very wrong. A leaked trove of foreign wealth data from the Swiss subsidiary of the banking giant H.S.B.C. made its way to various national tax authorities, and Scandinavian government officials shared it with Danish and Norweigan academics who were collaborating with Zucman. There were limits to what he could see in the H.S.B.C. trove, but it provided a suggestion of how much wealth from Scandinavian countries was being stored away in offshore hubs like Switzerland. In 2015, when the Panama Papers leaked, detailing the evasion efforts of the law firm Mossack Fonseca, it was possible to see the business of tax evasion in action—the lawyers, the pitch decks, the business analysts. Shrouding fortunes was the work of meticulous professionals; when Zucman and colleagues traced this wealth through tax shelters, they found it often was finally invested in ordinary stocks and bonds. “It was very mundane,” Zucman said.

Gradually, Zucman came to see tax evasion differently. “It’s not a psychological thing,” he said. There was a market. The key player wasn’t the billionaire, but the bankers and lawyers who Zucman came to think of as the tax-evasion industry. The professionals in this industry had bosses, and partners or shareholders; they worked within a regulated system. “If you have banks that feel that they are too big to indict then they will continue to commit some form of financial crimes,” Zucman said. “They will budget costs for fines.” In 2009, tax havens seemed like black holes, sucking out so much wealth that it warped the global economy. By 2019, they seemed dependent on the continued dormancy of the great liberal apparatus of international banking regulation, which could be quickly revived. “And the U.S.,” Zucman said, “you know, if there is a U.S. President that is serious about fighting global oligarchy, he or she has a ton of power.”

Zucman works in a small, spare office next door to Saez’s, on the sixth floor of Evans Hall at U.C. Berkeley. The cinder-block walls are undecorated, and the only personal touch I could see, when we met there a few weeks ago, was a small espresso machine. Zucman is fair-skinned, with round cheeks, light brown hair, and a longish nose, and he was wearing a black V-neck T-shirt and jeans. (The next morning, when we met again, he would be wearing a different black V-neck T-shirt and a different pair of jeans.) The scene seemed a bit unadorned for someone who had, this year, been named by Prospect magazine, in the U.K., as one of the fifty most influential thinkers on the planet. He speaks with a French accent and has an outsider’s sweeping, offhand way of talking. For all of Piketty’s fame—and his own, and Saez’s—Zucman mentioned several times that the economics profession had been slow to recognize inequality as a legitimate topic. He still seemed to have the outlook of a less powerful person than he now is.

Saez and Zucman have written a book, published this month, called “The Triumph of Injustice,” which assembles their research into a policy plan. (Its subtitle is the instruction-manual-like “How the Rich Dodge Taxes and How to Make Them Pay.”) One way to understand the book is as marking a new phase in the project that Piketty, Saez, and Zucman share. Having done more than just about any other economists to describe the powerful effect that accumulated wealth has on global inequality, they are now advocating for a solution: a highly progressive annual tax on wealth, an idea that has been adopted by Elizabeth Warren and Bernie Sanders. Zucman is the junior partner in the enterprise, but he has also been its chief propagandist, duelling on Twitter with economists who raise objections or philosophical gripes, and so the wealth-tax cause has come to reflect some of his own attributes: his tremendous explanatory power, his comfort with being an outsider to the establishment, and his great optimism in what government can know and do about the concentration of wealth.

A few weeks ago, Saez and Zucman flew to Washington for a pair of panels at the Brookings Institution presenting their ideas—one closed to reporters, and the other open to them—and at the open session Zucman gave a ten-minute presentation of the book, which, with admirable concision, boiled the essential story of wealth and the tax code down to two slides. The first displayed the results of their study of the aggregate burden of all federal, state, and local taxes after the 2017 Trump tax cuts, which concluded that the United States no longer has a progressive tax system—statistically, the Trump cuts dealt it a death blow. Most Americans now pay about the same portion of their income to the government (the upper-middle class pays very slightly more), and the wealthiest pay less. The slide is titled “A Giant Flat Tax Which Is Regressive at the Top End.”

To explain how this could be, Zucman likes to use the example of Warren Buffett. Forbes had estimated Buffett’s wealth to be sixty billion dollars, which suggested that his wealth was growing by about three billion dollars per year. But Buffett reported to the I.R.S. capital gains of about ten million—based on his sales of some shares in his own company, Berkshire Hathaway. For many years, Buffett has been pointing out that his tax rate is too low—the line has often been that he pays a lower effective rate than his secretary—and urging politicians to turn the screws a bit tighter on the ultra-wealthy. In response, Barack Obama proposed the Buffett Rule, a principle adopted by Hillary Clinton, in which people making more than a million dollars a year would have a minimum federal tax rate of thirty per cent. As of a couple of years ago, this was the frontier of mainstream Democratic tax policy, but, to Zucman, it was outlandishly inadequate. Raising the rate on the ten million dollars that was accessible to the I.R.S. made no statistical difference at all. The issue was the $59,990,000,000 that they could not touch. Apply the Buffett Rule, don’t apply the Buffett Rule; it didn’t much matter. “Functionally, his tax rate is zero per cent,” Zucman said.

The second chart examines the share of wealth held by the Forbes 400, which has mushroomed from one per cent of total wealth, at the outset of the Reagan era, to well over three per cent today. Had Warren’s wealth tax been in place all along, the Forbes 400’s share would now be about two per cent. Zucman and Saez propose a stricter wealth tax (ten per cent annually), which they say would have held the Forbes 400’s share constant, around one per cent. If you wanted something like the more equal pre-Reagan America for which Democratic politicians often grow nostalgic, they suggest, it would take a tax like that.

At the end of last year, Saez got an e-mail from Bharat Ramamurti, a longtime economic policy adviser of Elizabeth Warren’s, who said that Warren was interested in proposing a tax on wealth in some form. Zucman and Saez created a spreadsheet, using their own estimates of wealth, that allowed the Warren campaign to play around with different thresholds and rates for the tax. At first, Ramamurti sketched out a plan that taxed fortunes of twenty million dollars or more at one per cent. But in Saez and Zucman’s analysis—on the spreadsheet—wealth was so concentrated at the highest end that a more radically progressive tax, one which targeted a relatively small number of households, could still generate trillions in revenue. Eventually, the Warren campaign settled on a plan that would tax fortunes over fifty million dollars at two per cent annually, and those over one billion at three per cent, which Saez and Zucman estimated would raise the astonishing sum of $2.75 trillion over the course of ten years. (The entire revenue of the federal government, in the current budget year, is $3.4 trillion.) To Zucman, the choice had the added effect of averting a political problem that had bedevilled European wealth taxes, which tended to start with much smaller fortunes. “Above fifty million, you can’t really argue that these people can’t afford to pay,” Zucman told me.

Something quietly revolutionary was happening in these conversations, in January, between Ramamurti and the Berkeley economists, and between Ramamurti and his boss. For Democratic politicians and policymakers, taxes have generally served as a tool, to fund a program that they believe the people want. When Barack Obama proposed a broad expansion of public health insurance, his advisers developed an intricate, progressive system of taxes to pay for it, but the rates and thresholds for those taxes had been determined by the cost of the program. Ramamurti and Warren wanted to maximize revenue, and they also wanted to reduce inequality, which meant that they wanted a way to make the wealthy give up more of their fortunes. It wasn’t an ideological change so much as a conceptual one—about how pervasive and controlling the effects of inequality are. Taxing wealth to limit fortunes became a goal in itself.

Elizabeth Warren wasn’t the first candidate to consider tackling American wealth in this way. During the 2016 Presidential primaries, Zucman and Saez had an extended conversation with Warren Gunnels, Bernie Sanders’s longtime economic adviser, after Sanders had expressed interest in the idea of a wealth tax. The Berkeley economists scored various versions of the plan, estimating the revenue and economic effects, and eventually Gunnels brought a proposal to Sanders and the campaign. The reaction among his advisers was mixed, and, among the many other policy ideas the Sanders campaign was considering, this one simply drifted away. Sanders was already asking Americans to dream of a socialist society like Denmark’s or Sweden’s, and the wealth tax, which had not succeeded even in Europe, might have seemed especially exotic, and likely to trigger another round of denunciations in the American press.

After Hillary Clinton won the Democratic Presidential nomination, her advisers also spent several weeks considering whether to propose a wealth tax. As a matter of framing, one of her advisers explained to me, “There’s huge merit in the wealth tax—it does bring into sharp focus the inequity in our tax code as it relates to how you treat taxing income to wealth.” The campaign’s policy officials would evaluate how prone it might be to legal challenges, or to the wealthy avoiding or evading it—but it had an intuitive appeal. Because of the concentrations of wealth, the adviser said, “the sheer amount of money you can raise off a wealth tax is staggering.” Clinton herself was intrigued by the idea, and legal experts prepared memos about its constitutional viability, while Saez and Zucman helped Clinton’s tax advisers measure the revenue and economic impacts. But, as with the Sanders campaign, it was never formally proposed. The adviser went on, “It was a pretty exotic proposal. Given the way the election was shaping up, it didn’t seem like the proposal was going to alter the overarching narrative of the race. The reason I keep coming back to is inertia.”

But in 2016 not even the socialists had made the conceptual leap: that a wealth tax could have political appeal separate from, even exceeding, the appeal of the programs it funded. In September, eight months after Warren formally announced her proposal, Sanders introduced a wealth tax that was more extreme still: it starts at a one-per-cent marginal annual rate for households worth more than thirty-two million, and increases steeply, to eight per cent, on households worth more than ten billion. “What we are trying to do,” Sanders told reporters in September, “is demand and implement a policy which significantly reduces income and wealth inequality in America by telling the wealthiest families in this country they cannot have so much wealth.”

As a political matter, those eight months will be hard for Sanders to make up. The tax itself is now Warren’s signature proposal, and she has refined her campaign message around it. At rallies, she asks the crowd how many people own their own homes, and, once hands are in the air, points out that most Americans already pay a wealth tax on their biggest asset, they just call it a property tax. (“Great line,” the Clinton adviser told me. “We didn’t have that.”) “Your first fifty million is free and clear,” Warren likes to say on the campaign trail. “But your fifty millionth and first dollar, you gotta pitch in two cents, and two cents for every dollar after that.” By the time Warren held a rally before the brilliant edifice of the Washington Square arch last month, the crowds had begun to anticipate the line, and, as her speech wound toward the wealth tax, they chanted back at her, “Two cents! Two cents!” In 2016, Donald Trump would test out new lines at his rallies, little lures dropped into the depths of the crowd. Was there a bite? “Build the wall” and “Lock her up” came back at him, and eventually they became the substance of the campaign. Shout a slogan back to a candidate, and you have explained the campaign to itself.

The real resonance between Zucman and Saez’s proposals and the Presidential campaign of Elizabeth Warren, the champion of the Consumer Financial Protection Bureau, may be in their shared optimism about what the modern American administrative state can accomplish. When I asked William Gale, the co-director of the Urban-Brookings Tax Policy Center, what distinguished Saez and Zucman from the center-left policymakers who had preceded them, he mentioned two elements. First, he said, they wanted steeper taxes on the wealthy than even most progressives in Washingtonthey were left, not center-left. The second difference, Gale said, was more pronounced. “What I would describe as the previous center-left consensus is that we ought to raise taxes on the very rich, but that’s really hard to do,” Gale said. “Saez and Zucman come in and say, ‘In fact, it’s quite possible; it’s just a matter of enforcement and getting the taxes right—pushing on both fronts.’ Their policy optimism is very different from the conversations that people had in the Obama Administration, where it was often about how the wealthy had these tax-avoidance strategies, these armies of lawyers, that the administrative problems were extreme.”

As Saez and Zucman’s ideas moved to Washington, they met points of resistance, small and big. Jason Furman, who chaired President Obama’s Council of Economic Advisers, recently suggested on Twitter that the rich paid slightly more in taxes than Zucman and Saez’s graphs suggested. But the broader critiques took aim at their administrative optimism. Since the spring, the former Treasury Secretary Larry Summers and his colleague Natasha Sarin, a law professor at the University of Pennsylvania, have been arguing that Zucman and Saez have radically overestimated how much revenue a wealth tax would generate, and that the more realistic return, based on what the I.R.S. had been able to recoup from the estate tax, might be as little as one-eighth of their projections. Sarin told me, “The excitement around the Warren proposal is that, by taxing seventy-five thousand households and imposing a relatively minor additional tax burden on them, we can pay for just about everything we want. If that sounds a little unbelievable, I think that’s because it is a little unbelievable.”

Zucman and Saez published a full response in June, pointing out that, in several European countries that had tried a wealth tax, as well as Colombia, the average avoidance rate was about fifteen per cent; Summers and Sarin, they argued, assumed tax-avoidance rates of between eighty and ninety per cent. “They start from the premise that the rich cannot be taxed, to arrive at the conclusion that a tax on the rich would not collect much,” Zucman and Saez wrote. Their more colloquial argument was that there was nothing mysterious about wealth. Seventy per cent of the wealth of the top 0.1 per cent, Zucman argued, was in the form of stocks, bonds, and real estate—it was easily valued. More portable forms of wealth, like art or jewelry, could be assessed through insurance estimates. The trickiest form of wealth for tax authorities to value is privately held businesses; Saez and Zucman propose in their book that the I.R.S. could make an assessment, and if anyone disagreed they could simply transfer two per cent of their shares in the business to the government, which would then sell them at auction. Zucman’s deeper theory seemed to be that no strong wealth tax had ever been tried. The European models had very low thresholds (often starting around a million dollars), which made them vulnerable to political attack and legislative exemptions. Enforcement was often nonexistent. The largest economy to tax wealth in recent years is France’s, and that levy, Zucman pointed out, relied on self-reporting. “There was a box on the return for wealth, and you wrote a number in the box. That was all.”

Liberals have been agitating, for many years, for an end to the Reagan regime. Now, in Elizabeth Warren, the Democrats have a leading Presidential candidate who intends to unwind that era, and the question—the anxiety—is about how much might come undone. Natasha Sarin, Summers’s co-author, told me, “There’s another conceptual point that I find interesting. Bill Clinton, when he was running for President, said the world would be better if there were more millionaires. I was kind of stunned when I heard Bernie Sanders say that billionaires should not exist. There is something about that view that seems deeply alien to what many progressives, I think, believe. And, economically, I worry, it is deeply inefficient.” Zucman, by contrast, said at the Brookings conference that Piketty’s next book, due out next spring, would advocate a wealth tax of ninety per cent for billionaires. “Really,” Zucman told me, “you could abolish billionaires if you wanted to.”

From Zucman’s office window in Berkeley, it is possible to see clear across the bay to San Francisco, where the escalating forces of inequality had sent housing prices sky-high and pushed working-class people to the periphery of urban life, as they had in Paris. The formative political event in Zucman’s life was the 2002 French Presidential election, when he was fifteen, in which the nationalist Jean-Marie Le Pen won nearly five million votes in the first round, making it into the runoff, in part because of the sense that all of the gains of society were being hoarded by élites.

“You know,” Zucman said, “when you have the fall of the U.S.S.R., the fall of the Berlin Wall, some people say it’s the triumph of the free-market economy, the end of history, you won’t do better than that. And, especially now, in a globalized, integrated world, there’s no viable progressive platform that’s possible. And the left became discouraged, as it does—you know, ‘This is all a messy failure. It’s game over,’ ” Zucman said. “And now, thirty years later, people are realizing that there are all kinds of contradictions in the way our economies work, and we can do better.” The United States is only four per cent of the global population, he went on, but much of the rest of the world had remade itself in our image thirty years ago, and—if a progressive administration in Washington could implement a wealth tax, and strengthen international coöperation for higher corporate tax rates against tax evasion and offshore havens—maybe it would do so again. “You could change the U.S., but you could also change the world,” Zucman said. “Actually, you could be much more radical.”

Elizabeth Warren Pushes Further Restrictions on Lobbyists

Ahead of a major address in New York City, the Democratic hopeful is wrapping her campaign in an anticorruption pitch to Democratic primary voters

Sen. Elizabeth Warren is proposing a federal ban on all fundraising activities hosted by lobbyists as part of a new, broad set of anticorruption proposals, adding weight to a theme that has underpinned her White House bid.

The plan, outlined Monday morning on the blog site Medium, builds on anticorruption legislation Ms. Warren announced last year. It adds the new lobbying prohibitions, as well as a ban to prevent senior executive branch officials and members of Congress from serving on for-profit boards—whether or not they receive compensation from such positions. Ms. Warren, a Massachusetts Democrat, unveiled the proposal ahead of one of the splashiest events of her presidential campaign: an evening speech at New York City’s Washington Square Park.

The ideas are unlikely to become law while Republicans control the Senate and the White House. GOP lawmakers have generally lined up against similar proposals, citing constitutional concerns.

Typically, new restrictions on registered lobbyists lead to more Washington operatives deciding not to register, instead referring to themselves as consultants or strategic advisers. Ms. Warren says her plan would close that workaround by expanding the definition of lobbyist to include “all individuals paid to influence government.”

Such appeals to the idea that Washington is corrupt could pay off at the ballot box in 2020. In a WSJ/NBC News poll conducted last fall ahead of the midterm elections, 77% of all respondents said reducing the influence of special interests and corruption in Washington ranked as either the most important or a very important factor in deciding which candidate should get their vote. The only issue that ranked higher was the economy. Many Democrats who won House seats in 2018 campaigned on decreasing the influence of money in politics.

“Look closely, and you’ll see—on issue after issue, widely popular policies are stymied because giant corporations and billionaires who don’t want to pay taxes or follow any rules use their money and influence to stand in the way of big, structural change,” Ms. Warren wrote Monday.

Ms. Warren is also pushing to alter the definition of a “thing of value” in campaign finance laws to include tangible benefits made for campaign purposes, in what appeared to be a nod to President Trump.

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The Wall Street Journal reported in November 2018 that Mr. Trump intervened to suppress stories about alleged sexual encounters with women, including the former Playboy model Karen McDougal and the former adult-film star known professionally as Stormy Daniels, citing interviews with three dozen people, court papers, corporate records and other documents. The president’s former personal attorney, Michael Cohen, told a federal judge that Mr. Trump had directed him during the 2016 campaign to buy the silence of two women who said they had affairs with Mr. Trump.

Mr. Cohen pleaded guilty in August 2018 to eight criminal charges, including campaign-finance violations. Mr. Trump has denied the encounters.

Ms. Warren is additionally proposing making it harder for corporations to seal settlements of product liability litigation, something Democrats have called for in the past, notably in 2014 following a faulty ignition switch installed on 2.6 million General Motors vehicles.

Democrats’ Emerging Tax Idea: Look Beyond Income, Target Wealth

Lawmakers and 2020 candidates offer a range of options focused on capturing some of the trillions of dollars in assets belonging to the nation’s richest

The problem, Democrats say, is that capital gains are taxed only when gains are realized through a sale and become income. An investor who buys $10 million in stock that pays no dividend and watches it grow to $50 million doesn’t pay income tax on that appreciation unless the stock is sold.

If that investor dies before selling, the unrealized gains get wiped out, for income-tax purposes. The heirs treat the assets’ cost basis as $50 million, not $10 million; they face no income tax on the $40 million of capital gains if they sell, although an estate tax may be due. This long-standing elimination of unrealized gains at death, for tax purposes, is called “stepped-up basis.”

It means the optimal tax strategy for the very rich, fine-tuned and promoted by the wealth-planning industry, is straightforward: Hold assets until death, borrow against them for living expenses and barely pay income taxes.

Democrats are attacking the foundations of that strategy. They talked for years about raising taxes on high-income investors, citing Warren Buffett ’s claim of paying a lower tax rate than his secretary. They’ve succeeded in raising the top capital gains rate from 15% under President George W. Bush to 20%, plus the 3.8% tax on investment income added to fund the Affordable Care Act. The top ordinary-income rate is 37%.

Just raising capital-gains tax rates further wouldn’t require the likes of Mr. Buffett to report more of their growing wealth on their returns, make them more willing to sell assets or raise much revenue. In fact, if the capital-gains rate went above 28.5% without other changes, investors would delay so many sales that federal revenue would drop, according to the Tax Policy Center, a research group.

That would be a rare instance of the U.S. being on the wrong side of the Laffer Curve, named for economist Arthur Laffer, who projected that government revenue drops if tax rates get high enough.

Republicans see the same money accumulating and want to deploy it by not taxing it. Their goal, rather than generating money for expanded government programs, is to incentivize the private holders of capital to realize the gains and spur economic growth. The 2017 tax law created opportunity zones, which offer deferral and rate discounts for reinvesting capital gains in low-income areas. GOP lawmakers are pushing the Trump administration to consider the idea of indexing capital gains to inflation, reducing taxes on sales of long-held appreciated assets.

Still, some conservatives are moving closer to Democratic positions. In June, the Peterson Foundation, which favors budget-deficit reduction, invited plans from others, and three conservative groups proposed limiting or repealing stepped-up basis.

The Manhattan Institute’s Brian Riedl said it was the sort of concession conservatives would be willing to make “in exchange for tax reform or a grand deal” to curb entitlement spending.

In campaigns, Congress and academia, Democrats are shaping tax plans for 2021, when they hope to have narrow majorities. There are three main options.

The Biden Plan

President Obama left office with a list of ideas for taxing the rich that might have raised nearly $1 trillion over a decade. The most important was taxing capital gains at death.

The idea was too radical for a serious look from Congress at the time. Now, to a Democratic base that has moved left, it looks almost moderate.

Democrats are looking at major changes to the way capital gains taxation works. The effects of their tax proposals would depend on each taxpayer’s circumstances and on market performance.

CURRENT LAW

BIDEN PLAN

WYDEN PLAN

WARREN PLAN

Net worth above $50 million subject to a 2% annual tax, plus a 1% tax on net worth above $1 billion.

Assets can appreciate without capital gains taxes and heirs pay taxes only on gains in value after the original owner’s death.

Death would be considered a realization event, triggering capital gains taxes on appreciated assets, paid at ordinary income tax rates.

Each year, investors would pay income taxes on the gain in their assets. This is called a mark-to-market system.

Example one: Asset value begins at $40 million, 5% growth until person dies in year 25

Taxes taken out when transferred to heirs

$150 million

Current law

100

50

0

Year 1

25

Total taxes taken under law/plans:

$0

$35.6 million

$21.4 million

$11.9 million

Example two: Asset value begins at $200 million, 7% growth until year 12, person dies in year 25

$450 million

Current law

400

350

300

Taxes taken out when transferred to heirs

250

200

Year 1

25

Total taxes taken under law/plans:

$0

$88.4 million

$58.3 million

$121.2 million

Notes: Assumptions include one asset with annual taxes coming out of that asset’s value. Assumptions also include 40% tax rate for Wyden plan, though he hasn’t detailed a specific rate.  All totals in nominal dollars. Estimates don’t include estate taxes.

Sources: Campaign plans; WSJ analysis; Tax Foundation review

Former Vice President Joe Biden, the candidate most prominently picking up where Mr. Obama left off, has proposed repealing stepped-up basis. Taxing unrealized gains at death could let Congress raise the capital gains rate to 50% before revenue from it would start to drop, according to the Tax Policy Center, because investors would no longer delay sales in hopes of a zero tax bill when they die.

And indeed, Mr. Biden has proposed doubling the income-tax rate to 40% on capital gains for taxpayers with incomes of $1 million or more.

But for Democrats, repealing stepped-up basis has drawbacks. Much of the money wouldn’t come in for years, until people died. The Treasury Department estimated a plan Mr. Obama put out in 2016 would generate $235 billion over a decade, less than 10% of what advisers to Sen. Warren’s campaign say her tax plan would raise.

That lag raises another risk. Wealthy taxpayers would have incentives to get Congress to reverse the tax before their heirs face it.

Mr. Obama’s administration never seriously explored a wealth tax or a tax on accrued but unrealized gains, said  Lily Batchelder, who helped devise his policies.

“If someone’s goal is to raise trillions of dollars from the very wealthy, then it becomes necessary to think about these more ambitious proposals,” she said.

The Wyden Plan

Instead of attacking favorable treatment of inherited assets, Mr. Wyden goes after the other main principle of capital-gains taxation—that gains must be realized before taxes are imposed.

The Oregon senator is designing a “mark-to-market” system. Annual increases in the value of people’s assets would be taxed as income, even if the assets aren’t sold. Someone who owned stock that was worth $400 million on Jan. 1 but $500 million on Dec. 31 would add $100 million to income on his or her tax return.

The tax would diminish the case for a preferential capital-gains rate, since people couldn’t get any benefit from deferring asset sales. Mr. Wyden would raise the rate to ordinary-income levels. Presidential candidate Julián Castro also just endorsed a mark-to-market system.

For the government, money would start flowing in immediately. The tax would hit every year, not just when an asset-holder died. Mr. Wyden would apply this regime to just the top 0.3% of taxpayers, said spokeswoman Ashley Schapitl. Mr. Castro’s tax would apply to the top 0.1%.

Democratic Sen. Ron Wyden of Oregon, center, would tax annual increases in the value of assets, whether or not they were sold. PHOTO: JIM LO SCALZO/EPA/SHUTTERSTOCK

There are serious challenges. Revenue could be volatile as markets rise and fall. Also, the IRS would determine asset increases annually, requiring baseline values and ways to measure change. That’s easy for stocks and bonds but far more complicated for private businesses or artwork.

The rules would have to address how to treat assets that lose instead of gain value in a year, and how taxpayers would raise cash to pay taxes on assets they didn’t sell. Under Mr. Castro’s proposal, losses could be used to offset other taxes or carried forward to future years.

Mr. Wyden would include exemptions for primary residences and 401(k) plans. For assets that aren’t publicly traded, Mr. Castro would impose taxes only upon a sale, plus a charge applied to limit the benefits of tax deferral.

“We’re obviously going to spend a lot of time working this through because when you’re talking about an issue this important, this substantial, it’s important to get it right,” Mr. Wyden said.

The Warren Plan

The most ambitious plan comes from Sen. Warren of Massachusetts, whose annual wealth tax would fund spending proposals such as universal child care and student-loan forgiveness.

The ultra-rich would pay whether they make money or not, whether they sell assets or not and whether their assets are growing or shrinking.

Ms. Warren, who draws cheers at campaign events when she mentions the tax, would impose a 2% tax each year on individuals’ assets above $50 million and a further 1% on assets above $1 billion. Fellow candidate Beto O’Rourke has also backed a wealth tax, and it is one of Vermont Sen. Bernie Sanders ’ options for financing Medicare-for-All.

Ms. Warren’s plan appeals to some Democrats because it would raise a lot of money from a tiny number of people. According to economists working with her campaign, it would generate $2.75 trillion over a decade from 75,000 households. That would be roughly a 6% boost in federal revenue from under 0.1% of households.

For Democrats, the Warren plan has advantages: Money would come only from the very wealthiest. The IRS could focus enforcement on very few people. Revenue would come quickly.

Look at Mark Zuckerberg, ” said Gabriel Zucman, an economist at the University of California, Berkeley, who advised Ms. Warren, speaking of the Facebook Inc. founder. “Are you going to wait 50 years before you start taxing him through the estate tax?

Sen. Elizabeth Warren (D., Mass.), seen at the Iowa State Fair, would impose a wealth tax on the very rich. PHOTO: BRIAN SNYDER/REUTERS

In the real world, a wealth tax would emerge from Congress riddled with gaps that the tax-planning industry would exploit, said Jason Oh, a law professor at the University of California, Los Angeles. For example, if private foundations were exempted, the wealthy might shift assets into them.

“We’ve never seen in the history of taxation a pristine tax of any form,” Mr. Oh said. “People who want to pursue a wealth tax for the revenue may be a little disappointed when we see the estimates roll in.”

European countries tried—and largely abandoned—wealth taxes. They struggled because rich people could switch countries and because some assets were exempt. Mr. Zucman said Ms. Warren’s tax would escape the latter problem by hitting every kind of asset, from artwork to stock to privately held businesses to real estate.

While he and fellow economist Emmanuel Saez assume 15% of the tax owed would be avoided, former Treasury Secretary Larry Summers and University of Pennsylvania law professor Natasha Sarin wrote a paper estimating the plan would raise less than half what Mr. Zucman projects, based on how much wealth escapes the estate tax.

A paper by economists Matthew Smith of the Treasury Department, Eric Zwick of the University of Chicago and Owen Zidar of Princeton University contends top-end wealth is overstated. Acccording to their preliminary estimate, the top 0.1% have 15% of national wealth, instead of the 20% estimated by Mr. Zucman. Their findings imply that Ms. Warren’s tax might raise about half of what’s promised.

For an investment yielding a steady 1.5% return, a 2% wealth levy would be equivalent to an income-tax rate above 100% and cause the asset to shrink. That leads to the criticism that wealth taxes could push people to seek higher returns, possibly discouraging productive investment and adding risk to the financial system.

“You hear 1%, 2%, doesn’t sound that much. Paying 1%, 2% on an asset you have every single year, that can add up,” said Ben Ritz of the Progressive Policy Institute, a centrist Democratic-affiliated think tank. “You’re basically having the asset shed money over time.”

Sen. John Thune (R., S.D.) said wealth taxes would complicate tax administration and people would try to game them. PHOTO: STEFANI REYNOLDS/CNP/ZUMA PRESS

To audit 30% of wealthy taxpayers, as Mr. Zucman recommends, would involve tens of thousands of complex investigations, a challenge even if the IRS were beefed up as Ms. Warren proposes. The agency already struggles with similar calculations for estate taxes, engaging in long battles over valuing such things as fractional shares of family businesses. Under the wealth tax, those once-per-lifetime audits would become annual affairs.

The wealth tax also has an extra asterisk: it would be challenged as unconstitutional.

The Constitution says any direct tax must be structured so each state contributes a share of it equal to the state’s share of the population. A state such as Connecticut has far more multimillionaires per capita than many others, so its share of the wealth tax would far exceed its share of the U.S. population. How Ms. Warren’s wealth tax might be categorized or affected is an unsettled area of law relying on century-old Supreme Court precedents.

Still, the wealth tax polls well, and Democratic candidates are eager to draw a contrast with President Trump, a tax-cutting billionaire.

Republicans will push back. Rep. Tom Reed (R., N.Y.) says tax increases aimed at the top would reach the middle class. “It easily goes down the slippery slope,” he said. “If it’s the 1%, it’s the top 20%.” he said.

Be very skeptical about how much revenue Elizabeth Warren’s wealth tax could generate

Their response is disingenuous. They focus most of their fire on what they label as our revenue estimate: that the proposed wealth tax would raise $25 billion annually, rather than the $187 billion they estimate. In reality, we are explicit that $25 billion is a rough back-of-the-envelope number and state that “We would be surprised if the $25-billion-a-year figure we suggest was not a significant underestimate of the revenue potential of a 2 percent wealth tax.” The purpose of our piece was not to provide an alternative revenue estimate for the wealth tax but to call into question the naively high estimate provided by Saez and Zucman.

.. As we explain at some length in our piece, naive estimation of the kind offered by Saez and Zucman tends to be way optimistic relative to scorekeeping by government experts. This point is well illustrated by the difference between academic and government estimates of taxing carried interest as ordinary income or of the value-added tax. Nothing in Saez and Zucman’s response suggests they are immune from this problem.

They attempt a broad allowance for tax avoidance, assuming the rich would successfully shelter at most 15 percent of their wealth from taxation. They base this guess on four academic studies that consider the international experience of wealth taxation, which find that a 1 percent wealth tax reduces reported wealth by 0.5 and 35 percent, which they simply average to 15 percent. But this strikes us as too low.

First, Saez and Zucman’s interpretation of the international experience differs from ours. They rely on estimates suggesting that a 1 percent wealth tax in Denmark and Sweden results in evasion of less than 1 percent (which makes their 15 percent estimate look huge). But in both countries, wealth taxation proved so easy to avoid and so difficult to administer that these taxes were repealed. In fact, of the 12 nations in the Organization for Economic Cooperation and Development that had wealth taxes in 1990, only three still have them today.

Second, the estate tax is informative on the potential magnitude of wealth tax evasion. Let’s consider Saez and Zucman’s estimated tax base for people with wealth greater than $50 million: about $9.3 trillion in 2019. If we were to apply the current 40 percent estate tax to this figure — assuming 2 percent of those families will experience a death this year (a conservative estimate) — we would expect that tax to generate about $75 billion this year. And if we apply the effective estate tax to that figure (accounting for charitable contributions and spousal bequests), it would raise $25 billion this year. In reality, the estate tax will raise about $10 billion from estates of more than $50 million this year. In other words, it seems plausible that tax avoidance is closer to 60 percent.

It is worth noting that estimating the tax base for those worth more than $50 million in itself is a difficult task — let alone estimating the revenue that taxing these households can raise. Different approaches to measuring top wealth can paint very different pictures. And the numbers reported in the Forbes 400, which Saez and Zucman rely on repeatedly in their rejoinder, are thought of by many as dubious.

This isn’t to say that our method should be viewed as definitive, but it does suggest the Saez and Zucman estimation is likely too high. As an illustration of the crudity of their analysis: They neglect to contend with behavioral responses that would inevitably follow a 2 percent tax on a small group of wealth holders. For example, there would be a significant incentive to accelerate charitable giving, which would decrease the wealth tax base. It seems important to account for the fact that the wealthy (and their tax planners) will inevitably be motivated to limit tax liability.

Saez and Zucman are at pains to suggest that their proposal is for a ramped-up Internal Revenue Service that is much more serious about collections than the current estate tax. We share their view that more could be done to collect estate tax revenue (and tax revenue more generally).

And we certainly do not start from “the premise that the rich cannot be taxed,” as Saez and Zucman allege. Instead, we share their objective that it is imperative to raise more tax revenue from those at the very top, and we propose a variety of progressive reforms to this end.

However, government budget scorekeepers properly score proposals in the form in which they would likely be enacted, not on the basis of the aspirations of their academic authors. So, we stand by our position — which will possibly be tested someday — that official scorekeepers would be very unlikely to validate the Saez-Zucman estimate of Warren’s proposed wealth tax, and that the gap would likely be substantial.