“For the first time ever, we are having a national political conversation about billionaires in American life,” a historian said.
The political and economic power wielded by the approximately 750 wealthiest people in America has become a sudden flash point in the 2020 presidential election, as the nation’s billionaires push back with increasing ferocity against calls by liberal politicians to vastly reduce their fortunes and clout.
On Thursday, Michael Bloomberg, a billionaire and former mayor of New York City, took steps to enter the presidential race, a move that would make him one of four billionaires who either plan to seek or have expressed interest in seeking the nation’s highest office in 2020. His decision came one week after Sen. Elizabeth Warren (D-Mass.) proposed vastly expanding her “wealth tax” on the nation’s biggest wealth holders and one month after Sen. Bernie Sanders (I-Vt.) said America should not have any billionaires at all.
The populist onslaught has ensnared Facebook founder Mark Zuckerberg and Microsoft co-founder Bill Gates, led to billionaire hand-wringing on cable news, and sparked a panicked discussion among wealthy Americans and their financial advisers about how to prepare for a White House controlled by populist Democrats.
Past presidential elections have involved allegations of class warfare, but rarely have those debates centered on such a small subset of people.
“For the first time ever, we are having a national political conversation about billionaires in American life. And that is because many people are noticing the vast differences in wealth and opportunity,” said Timothy Naftali, a historian at New York University.
The growing hostilities between the ascendant populist wing of the Democratic Party and the nation’s tech and financial elite have spilled repeatedly into public view over the past several months, but they reached a crescendo last week with news that Bloomberg may enter the Democratic primary. With the stock market at an all-time high, the debate about wealth accumulation and inequality has become a top issue in the 2020 campaign.
The leaders of the anti-billionaire populist surge, Warren and Sanders, have cast their plans to vastly increase taxes on the wealthy as necessary to fix several decades of widening inequality and make necessary investments in health care, child care spending and other government programs they say will help working-class Americans.
Financial disparities between the rich and everyone else have widened over the past several decades in America, with inequality returning to levels not seen since the 1920s, as the richest 400 Americans now control more wealth than the bottom 60 percent of the wealth distribution, according to research by Gabriel Zucman, a left-leaning economist at the University of California at Berkeley. The poorest 60 percent of America has seen its share of the national wealth fall from 5.7 percent in 1987 to 2.1 percent in 2014, Zucman found.
But the efforts at redistribution pushed by Warren and Sanders have elicited a fierce and sometimes personal backlash from the billionaire class who stand to lose the most. At least 16 billionaires have in recent months spoken out against what they regard as the danger posed by the populist Democrats, particularly over their proposals to enact a “wealth tax” on vast fortunes, with many expressing concern they will blow the election to Trump by veering too far left.
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Bloomberg’s potential presidential bid follows that of fellow billionaires Tom Steyer, a major Democratic donor, and former Starbucks CEO Howard Schultz, who in September suspended his independent presidential bid. Steyer has proposed his own wealth tax, but Schultz ripped the idea as “ridiculous,” while Bloomberg suggested it was not constitutional and raised the prospect of America turning into Venezuela.
Piling on against the wealth tax have been corporate celebrities from Silicon Valley and Wall Street. Zuckerberg suggested Sanders’s call to abolish billionaires could hurt philanthropies and scientific research by giving the government too much decision-making power. Microsoft co-founder Gates criticized Warren’s wealth tax and mused about its impact on “the incentive system” for making money.
David Rubenstein, the billionaire co-founder of the Carlyle Group, told CNBC that a wealth tax would not “solve all of our society’s problems” and raised questions about its practicality. Also appearing on CNBC, billionaire investor Leon Cooperman choked up while discussing the impact a wealth tax could have on his family.
Amazon founder Jeff Bezos, a multi-billionaire and the world’s richest man, asked Bloomberg months ago to consider running for president in 2020, Recode reported Saturday. A Bloomberg spokesman did not immediately return a request to confirm the call. (Bezos is the owner of The Washington Post.) An Amazon spokeswoman did not respond to a request for comment.
“I don’t need Elizabeth Warren, or the government, giving away my money,” Cooperman said. “[Warren] and Bernie Sanders are presenting a lot of ideas to the public that are morally, and socially, bankrupt.”
Then there is perhaps the most prominent wealthy person of all likely to stand in the way of populist Democrats’ proposals: President Trump. Asked about the wealth tax, a White House spokesman declined to comment directly on the proposal but said in an email, “President Trump has been very clear: America will never be a socialist country.”
But there are signs the pushback is having little impact on nixing the idea in Democrats’ minds. Rep. Brendan Boyle (D-Pa.), who has endorsed Joe Biden for the Democratic nomination, told The Washington Post he is crafting a new wealth tax proposal to introduce in the House of Representatives. Boyle’s involvement suggests the idea has broader political support among Democrats than previously thought.
Warren’s campaign has created a tax calculator that shows how much money multimillionaires would pay under her plan. The initial wealth tax raised by Warren would raise close to $3 trillion over 10 years — enough money to fund universal child care, make public colleges and universities tuition-free, and forgive a majority of the student debt held in America, according to some nonpartisan estimates.
America has long had rich people, but economists say the current scale of inequality may be without precedent. The number of billionaires in America swelled to 749 in 2018, a nearly 5 percent jump, and they now hold close to $4 trillion collectively.
“The hyper concentration of wealth within the top 0.1 percent is a mortal threat to the American economy and way of life,” Boyle said in an interview. “If you work hard and play by the rules, then you should be able to get ahead. But the recent and unprecedented shift of resources to billionaires threatens this. A wealth tax on billionaires is fair and, indeed, necessary.”
But conservatives and even many Democrats have raised a number of objections to the wealth tax, arguing it could be easily skirted and may have limited political appeal. Microsoft’s Gates, famous for his philanthropic efforts, joked to the New York Times that it could erase his entire fortune. Sen. Chris Van Hollen (D-Md.) and Rep. Don Beyer (D-Va.) this week proposed a surtax on couples earning more than $2 million a year to address what they framed as unfairness in the tax code exacerbated by the Republican tax cuts, while stopping short of the starker wealth tax.
In an email, Bloomberg adviser Howard Wolfson denied that the prospect of paying the wealth tax factors into the former mayor’s interest in running for president: “Mike’s not worried about what would happen if Elizabeth Warren won. He’s worried about what would happen if Donald Trump won.”
Still, the ultrarich have still taken notice of the threat, according to interviews with half a dozen financial planners and wealth managers.
Kathryn Wylde, president of the Partnership for New York City, whose membership includes many of the country’s biggest financial firms, said members of the business community are “agonizing” over the prospect of having to choose between Warren and Trump in the general election.
“A lot of people in the Wall Street crowd still think the world is top-down,” Wylde said. “They think the people at the top of the pecking order are still making the decisions or driving the debate, as opposed to the new reality of grass-roots mobilization. They don’t realize the way pushback to their criticism goes viral.”
Lance Drucker, president and CEO of Drucker Wealth Management, said he has recently heard alarm from many of his millionaire clients over plans like Warren’s to implement a wealth tax on fortunes worth more than $50 million.
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“Honestly, it’s only been the last month when people started getting worried,” said Drucker in an October interview. “These tax proposals are scaring the bejeezus out of people who have accumulated a lot of wealth.”
Some financial planners are urging wealthy clients to transfer millions to their offspring now, before Democrats again raise estate taxes. Attorneys have begun looking at whether a divorce could help the super-rich avoid the wealth tax. And some wealthy people are asking whether they should consider renouncing their U.S. citizenship and moving to Europe or elsewhere abroad ahead of Democrats’ potential tax hikes.
“You’re hearing it already,” said Jonathan Lachowitz, a financial planner at White Lighthouse Investment Management, who said he has heard discussions about leaving the country and renouncing citizenship or other legal tax planning moves due to Democrats’ tax plans from several multimillionaires. “As the frustration mounts and tax burdens rise, people will consider it, just the way you have New Yorkers moving to Florida.”
Robert Reich, former Secretary of Labor and author of “The Common Good,” joins CNBC’s “Power Lunch” team alongside “The Profit’s” host Marcus Lemonis to discuss Elizabeth Warren’s wealth tax and the so-called war on wealth.
Bruce Bartlett is a former Treasury deputy assistant secretary for economic policy. His new book, The Benefit and the Burden: Tax Reform — Why We Need It and What It Will Take, has been published by Simon & Schuster.
In this article, Bartlett explains that President Obama’s endorsement of the “Buffett rule” to raise taxes on those with high incomes and Republican efforts to require dynamic scoring for tax bills will lead to a debate on what tax rate maximizes federal revenues. This is an issue that has been debated since the 1970s. Recent academic research shows that the top U.S. rate could rise substantially from its current level of 35 percent before the increase would have such disincentive effects that revenues would start to fall.
Bruce Bartlett (Goodman/Van Riper)
With the economy recovering and increasing attention being paid to the budget deficit, Republicans are finding it harder and harder to gain political traction on tax cuts. Although they continue to maintain that spending can easily be cut enough to finance even a big tax cut, they are quietly preparing an alternative strategy. They are moving to force the Joint Committee on Taxation and the Congressional Budget Office to adopt dynamic scoring, which would incorporate macroeconomic growth effects into revenue estimates. Republicans have long believed that incorporating those effects would greatly reduce the budgetary cost of tax cuts and make them easier to enact.1
Dynamic scoring got started with the so-called Laffer curve, supposedly drawn on a napkin in 1974 by University of Chicago business Professor Arthur Laffer for Donald Rumsfeld and Dick Cheney, both members of President Ford’s staff.2 The curve was popularized by Wall Street Journal editorial writer Jude Wanniski, who first described it in a 1975 article.3 He went on to develop it at greater length in his 1979 book, The Way the World Works.
At its core, the Laffer curve is unobjectionable. It shows simply that neither a 0 percent tax rate nor a 100 percent tax rate raises revenue; somewhere in between is a rate that maximizes revenue. The trick is to empirically estimate the revenue-maximizing rate based on the existing tax regime and economic conditions. It turns out that even supply-side economists have seldom found examples of tax rates that were so high that a rate cut would increase revenue.
In the 1970s Harvard economist Martin Feldstein and others argued that a cut in the capital gains rate would raise net revenue. However, that was mainly a short-term unlocking effect. A Treasury Department study later concluded that the cuts in the capital gains rate in 1978 and 1981 reduced long-term capital gains revenue and did not materially increase economic growth.4
When asked about the impact on revenues of an across-the-board rate cut, as proposed in the 1978 Kemp-Roth bill and later by President Reagan, Laffer declined to estimate whether that would raise revenue even though tax rates were substantially higher than they are now, with a top rate of 70 percent. The most Laffer would say was that the Kemp-Roth tax cut would self-finance by reducing spending for things like unemployment compensation as economic growth increased, raising private saving, reducing the value of tax shelters, and creating higher revenues at state and local levels.5
In 1978 economists Norman Ture and Michael Evans incorporated supply-side economics into their detailed revenue forecasts, and both concluded that the Kemp-Roth bill would never pay for itself. Ture estimated substantial revenues losses, net of feedback, even 10 years after enactment, when revenues would still be $53 billion (in 1977 dollars) below baseline.6 Evans’s figures were very similar, showing a $61 billion deficit increase in 1987.7
Contrary to popular belief, the Reagan administration never incorporated Laffer curve effects into its revenue estimates for the 1981 tax cut. All published estimates conformed to standard Treasury revenue-estimating methods and were almost identical to independent estimates done by the CBO.8
Treasury tried to empirically estimate the Laffer curve in 1984. It concluded that most tax cuts lose revenue. Rate cuts for those in the top bracket had the potential to raise revenue, but only in the long term. In the short term, revenues would fall. As Treasury explained:
Discussions of the Laffer Curve often presume that there is a single aggregate tax rate elasticity that applies to a nation. Thus they argue over whether a tax cut will increase or decrease revenues. In reality there is not a single tax rate and tax elasticity. Rather, there is a series of tax rates and elasticities that pertain to different income classes. Our estimates suggest that the income tax base is not very responsive to tax rate changes in the income categories occupied by most Americans. In this sense, they are highly consistent with estimates by other researchers indicating that aggregate tax elasticity is quite small.
9
In 1985 economist Lawrence Lindsey attempted to compute the revenue-maximizing tax rate. Given the 1982 tax structure, which had a top rate of 50 percent, Lindsey concluded that reducing the top rate to 43 percent would raise revenue, but that reducing any other rates would lose revenue.10
Not much was heard about the revenue-maximizing top rate for some years because tax reductions were the order of the day. But as the need to raise revenue — and perhaps legislate increases in the top tax rate, for both revenue and distributional reasons — has become pressing, there is once again interest in the subject.
An important contribution to the discussion happened in 2009. N. Gregory Mankiw, chair of the Council of Economic Advisers under George W. Bush and widely considered to be among the most conservative U.S. economists, coauthored a paper that explored optimal tax theory and concluded that the optimal marginal tax rate is between 48 and 50 percent.11
Also in 2009, economists Mathias Trabandt and Harald Uhlig examined revenue-optimizing tax rates for the United States and Europe. They found that the United States is well below the revenue-maximizing top rate of 63 percent, that taxes on labor could be increased by 30 percent before labor supply dropped enough to reduce revenues from further increases, and that taxes on capital could be increased by 6 percent.12
A 2010 paper by economists Anthony Atkinson and Andrew Leigh looked at five different Anglo-Saxon countries and found similar tax elasticities among high-income taxpayers. They concluded that the revenue-maximizing top rate is at least 63 percent and may be as high as 83 percent.13
Most recently, economists Peter Diamond and Emmanuel Saez concluded in a 2011 paper that the revenue-maximizing top tax rate is 73 percent — well above the current top rate of 42.5 percent.14
Informal surveys of top economists confirm that the top tax rate could increase substantially before the Laffer effect caused revenues to decline. One survey was taken by The Washington Post in 2010 and quoted University of Michigan economist Joel Slemrod as suggesting that the revenue-maximizing top rate is at least 60 percent:
The idea that we are on the wrong side [of the Laffer curve] has almost no support among academics who have looked at this. Evidence doesn’t suggest we’re anywhere near the other end of the Laffer Curve.
15
University of California, Berkeley, economist Brad DeLong and Dean Baker of the Center for Economic and Policy Research have said that the revenue-maximizing top rate is about 70 percent. Even conservative economic journalists Larry Kudlow of CNBC and Stephen Moore of the Wall Street Journal editorial page said that revenues would rise until the top rate hit at least 50 percent.16
Revenue Loss From Tax Cuts for the Top 1 Percent of Taxpayers Since 1986 (billions of dollars) ______________________________________________________________________________
1986 Revenues Actual Effective Effective Year Rate (percent) Actual Revenues Rate of 33.1% Difference ______________________________________________________________________________
Total $5,629.8 $7,417.8 $1,788.0 ______________________________________________________________________________
Source: Author's calculations based on IRS data.
I’m not sure how much we could raise the top rate before it would become counterproductive in terms of revenue. But I think it is revealing that as recently as 1986, during the Reagan administration, those in the top 1 percent of taxpayers, ranked by adjusted gross income, had an effective federal income tax rate of 33.1 percent when the top marginal rate was 50 percent. Their effective rate has been significantly lower every year since. Had they simply kept paying the same effective rate, the federal government would have reaped $1.8 trillion in aggregate additional revenue between 1987 and 2009, not counting interest.
Of course, it goes without saying that the optimal tax rate in terms of revenue is not necessarily the one that maximizes growth or is socially optimal. Personally, I would prefer not to have a top income tax rate exceeding 50 percent, because it is important psychologically and morally that people not be forced to give more than half of their income to the federal government. However, given the magnitude of our nation’s fiscal problem, a rate higher than that may be inevitable unless the United States adopts a VAT, carbon tax, or other broad-based tax to supplement existing revenue sources.
FOOTNOTES
1 On February 2 the House passed H.R. 3582, the Pro-Growth Budgeting Act of 2012, Doc 2012-1555, 2012 TNT 17-22, which would force the JCT and CBO to do a dynamic score for major tax bills, but not for appropriations bills.
2 Arthur Laffer, “The Laffer Curve: Past, Present, and Future,” Heritage Foundation Report No. 1765 (June 1, 2004).
3 Jude Wanniski, “The Mundell-Laffer Hypothesis — A New View of the World Economy,” The Public Interest (Spring 1975), at 49-50.
4 Treasury report to Congress on the capital gains tax reductions of 1978 (1985).
5 Bruce Bartlett, The New American Economy 113 (2009).
6 House Ways and Means Committee, “Tax Reductions: Economists’ Comments on H.R. 8333 and S. 1860 (The Kemp-Roth Bills)” (1978), at 96.
7 House and Senate Budget committees, “Leading Economist’s Views of Kemp-Roth” (1978), at 76.
8 Bartlett, “The 1981 Tax Cut After 30 Years: What Happened to Revenues?” Tax Notes, Aug. 8, 2011, p. 627, Doc 2011-16766, 2011 TNT 152-7.
9 James Gwartney and James Long, “Income Tax Avoidance and an Empirical Estimation of the Laffer Curve,” Treasury’s Office of Economic Policy (July 1984), at 22.
10 Lawrence Lindsey, “Estimating the Revenue Maximizing Top Personal Tax Rate,” National Bureau of Economic Research Working Paper No. 1761 (Oct. 1985), at 18.
11 N. Gregory Mankiw et al., “Optimal Taxation in Theory and Practice,” 23 J. of Econ. Persp. 147, 158 (Fall 2009).
12 Mathias Trabandt and Harald Uhlig, “How Far Are We From the Slippery Slope? The Laffer Curve Revisited,” NBER Working Paper No. 15343 (Sept. 2009).
13 A.B. Atkinson and Andrew Leigh, “The Distribution of Top Incomes in Five Anglo-Saxon Countries Over the Twentieth Century,” Institute for the Study of Labor (IZA) Working Paper No. 4937 (May 2010), at 29.
14 Peter Diamond and Emmanuel Saez, “The Case for a Progressive Tax: From Basic Research to Policy Recommendations,” 25 J. of Econ. Persp. 165, 171 (Fall 2011).
15 Dylan Matthews, “Where Does the Laffer Curve Bend?” The Washington Post, Aug. 9, 2010.
The census fails to account for taxes and most welfare payments, painting a distorted picture.
Never in American history has the debate over income inequality so dominated the public square, with Democratic presidential candidates and congressional leaders calling for massive tax increases and federal expenditures to redistribute the nation’s income. Unfortunately, official measures of income inequality, the numbers being debated, are profoundly distorted by what the Census Bureau chooses to count as household income.
The published census data for 2017 portray the top quintile of households as having almost 17 times as much income as the bottom quintile. But this picture is false. The measure fails to account for the one-third of all household income paid in federal, state and local taxes. Since households in the top income quintile pay almost two-thirds of all taxes, ignoring the earned income lost to taxes substantially overstates inequality.
How Redistribution Works
Average earned and net income by quintile, 2017
$300,000
Earned income
250,000
200,000
Net transfers
Net taxes
150,000
100,000
Net income
Net income
50,000
Earned income
0
1
2
3
4
5
Source: Calculations by authors based on official government data
The Census Bureau also fails to count $1.9 trillion in annual public transfer payments to American households. The bureau ignores transfer payments from some 95 federal programs such as
Medicare,
Medicaid and
food stamps,
which make up more than 40% of federal spending, along with dozens of state and local programs. Government transfers provide 89% of all resources available to the bottom income quintile of households and more than half of the total resources available to the second quintile.
In all, leaving out taxes and most transfers overstates inequality by more than 300%, as measured by the ratio of the top quintile’s income to the bottom quintile’s. More than 80% of all taxes are paid by the top two quintiles, and more than 70% of all government transfer payments go to the bottom two quintiles.
America’s system of data collection is among the most sophisticated in the world, but the Census Bureau’s decision not to count taxes as lost income and transfers as gained income grossly distorts its measure of the income distribution. As a result, the raging national debate over income inequality, the outcome of which could alter the foundations of our economic and political system, is based on faulty information.
The average bottom-quintile household earns only $4,908, while the average top-quintile one earns $295,904, or 60 times as much. But using official government data sources on taxes and all transfer payments to compute net income produces the more complete comparison displayed in the nearby chart.
PHOTO: GETTY IMAGES/ISTOCKPHOTO
The average bottom-quintile household receives $45,389 in government transfers. Private transfers from charitable and family sources provide another $3,313. The average household in the bottom quintile pays $2,709 in taxes, mostly sales, property and excise taxes. The net result is that the average household in the bottom quintile has $50,901 of available resources.
Government transfers go mostly to low-income households. The average bottom-quintile household and the average second-quintile household receive government transfers of some $17 and $4 respectively for every dollar of taxes they pay. The average middle-income household receives $17,850 in government transfers and pays an almost identical $17,737 in taxes, while the fourth and top quintiles of households receive government transfers of only 29 cents and 6 cents respectively for every dollar paid in taxes. (In the chart, transfers received minus taxes paid are shown as net government transfers for low-income households and net taxes for high income households.)
The average top-quintile household pays on average $109,125 in taxes and is left, after taxes and transfer payments, with only 3.8 times as much as the bottom quintile: $194,906 compared with $50,901. No matter how much income you think government in a free society should redistribute, it is much harder to argue that the bottom quintile is getting too little or the top quintile is getting too much when the ratio of net resources available to them is 3.8 to 1 rather than 60 to 1 (the ratio of what they earn) or the Census number of 17 to 1 (which excludes taxes and most transfers).
Today government redistributes sufficient resources to elevate the average household in the bottom quintile to a net income, after transfers and taxes, of $50,901—well within the range of American middle-class earnings. The average household in the second quintile is only slightly better off than the average bottom-quintile household. The average second-quintile household receives only 9.4% more, even though it earns more than six times as much income, it has more than twice the proportion of its prime working-age individuals employed, and they work twice as many hours a week on average. The average middle-income household is only 32% better off than the average bottom-quintile households despite earning more than 13 times as much, having 2.5 times as many of prime working-age individuals employed and working more than twice as many hours a week.
Antipoverty spending in the past 50 years has not only raised most of the households in the bottom quintile of earners into the middle class, but has also induced many low-income earners to stop working. In 1967, when funding for the War on Poverty started to flow, almost 70% of prime working-age adults in bottom-quintile households were employed. Over the next 50 years, that share fell to 36%. The second quintile, which historically had the highest labor-force participation rate among prime work-age adults, saw its labor-force participation rate fall from 90% to 85%, while the top three income quintiles all increased their work effort.
Any debate about further redistribution of income needs to be tethered to these facts. America already redistributes enough income to compress the income difference between the top and bottom quintiles from 60 to 1 in earned income down to 3.8 to 1 in income received. If 3.8 to 1 is too large an income differential, those who favor more redistribution need to explain to the bottom 60% of income-earning households why they should keep working when they could get almost as much from riding in the wagon as they get now from pulling it.
Bruce Bartlett (Goodman/Van Riper)
