Bernie and Elizabeth Wage War on the Young

In exchange for ‘free’ college, millennials will pick up middle-class boomers’ extravagant tab.

Millennials are too young to remember Monty Hall’s original “Let’s Make a Deal” game show, unless they’ve seen reruns on cable. So it might not be immediately clear to these voters that baby boomers are asking them to play a version of that game right now. Or that this political version is rigged.

Behind door number 1: the “car” of $1.6 trillion in student-loan relief, plus free college for all. Behind door number 2: the “goat” of uncountable tens of trillions of dollars in unfunded Social Security and Medicare liabilities to benefit boomers.

This is the best way to understand the flamboyant debt-forgiveness proposals lately put forward by the likes of Bernie Sanders and Elizabeth Warren. These programs are presented—not least by the sponsors themselves—as a form of old-style, rich-versus-poor class warfare. Mr. Sanders says he can fund $2.2 trillion of debt forgiveness and free public-university degrees with a financial-transactions tax on “Wall Street speculators.” Ms. Warren says her relatively modest $1.25 trillion debt-and-tuition deal can be financed by a wealth tax.

Stipulate that what we’re talking about here, on student loans or any other issue in the resentment sweepstakes of the Democratic presidential primary, doesn’t really help the poor. The audience for the class-war rhetoric from Mr. Sanders and Ms. Warren is the middle class, which is the intended recipient of most of the redistribution they promise. Even with the income limits on eligibility Ms. Warren builds into her plan, 58% of the debt relief would flow to households with incomes between $42,000 and $111,000. Mr. Sanders imposes no limits at all—his proposal is a subsidy for doctors and lawyers more than anyone else.

No surprise here. Redistribution to the middle class is a conspicuous feature of the European social-welfare states American leftists admire. This is why it doesn’t matter that the student-debt fiasco is mainly a middle-income crisis. That’s a trenchant but not entirely relevant observation raised by some conservative critics befuddled that Mr. Sanders and Ms. Warren are investing so much political capital in a giveaway for the better-off. The middle-class nature of the new entitlement is the whole point. That’s where the votes are, and also where any sense of economic hardship lingers in developed economies that already have solved the worst problems of extreme poverty.

What these politicians aren’t telling millennials, though, is that the middle class always pays for its own benefits in some way. Financial-transaction taxes chronically underperform estimates of the revenue they’ll generate, and wealth taxes are so ineffective that even France scrapped its version in despair in 2017.

Much heavier middle-class taxation is what feeds European social-welfare states. The taxman takes well north of 30% of the total labor income of the average single-earner household in France, Germany, Sweden and Norway, compared with 19% in the U.S., according to the Organization of Economic Cooperation and Development.

And if you think middle-class boomers are lining up to pay their “fair share” toward student debt relief once all the wealth-taxation gimmicks have failed, think again.

The federal government is running a deficit today, and politicians of both parties show little willingness to balance the budget in the immediate future. Absent entitlement reform, the task will become impossible in the 2030s once the youngest boomers have retired and started drawing the Social Security and Medicare benefits they never bothered to fund. After wealth taxes fail to generate the expected revenue, the Bernies and Warrens will turn to borrowing to finance student-loan relief—those new government debts to be repaid, naturally, by the millennial taxpayers of the future.

What’s the point, then? A cynic would suggest the student-loan gimmick is primarily an inducement for younger voters who’ll unwittingly assent to assume the fiscal burdens of old-age entitlements.

Those programs might be at least partially reformed, and their fiscal drag on the young ameliorated, by rebalancing their benefits away from middle-class boomers, perhaps via means-testing. But boomers have always staunchly resisted such reforms, and no politicians have been as fearsome tribunes of that refusal as progressives of the Bernie Sanders and Elizabeth Warren variety.

So faux debt relief is likely on offer in order to induce millennials to elect either of two progressive presidential candidates who will absolutely never, under any circumstances, ease the fiscal burdens of the much larger old-age entitlements distributed to the elderly tranche of the middle class.

Think a student-debt write-down and free college is a great deal? Wait until you see what you’ll have to pay in return.

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.

The Trouble With Taxing Wealth

Elizabeth Warren’s proposed tax on net worth seems like a nearly surgical strike at inequality, but it may not be efficient

The median U.S. family’s income, adjusted for inflation, fell 4% between 2007 and 2016, while its wealth plummeted 20%, according to Federal Reserve figures. For the richest 10% of families, median income rose 9% while wealth leapt 27%.
More than 80% of American households had less wealth in 2016 than on the eve of the last recession, in great part because their homes, the principal asset for most families, were below their precrisis values whereas stocks, whose ownership is concentrated among the rich, have roughly doubled since 2007..
.. This poses a number of challenges. For the middle class, stagnant wealth limits their ability to
  • buy a home,
  • pay for college or
  • respond to a financial emergency.

Wealth imbalances may also undercut economic growth because assets, which typically rise in response to interest rate cuts, are concentrated among people who are less inclined to spend.

This poses a number of challenges. For the middle class, stagnant wealth limits their ability to buy a home, pay for college or respond to a financial emergency. Wealth imbalances may also undercut economic growth because assets, which typically rise in response to interest rate cuts, are concentrated among people who are less inclined to spend.

For policy makers who want to tax the rich more, this limits the reach of income and consumption taxes. Shielding capital income leaves a big chunk of the richest families’ incomes untouched by taxes, says Greg Leiserson, director of tax policy at the Washington Center for Equitable Growth, a left-of-center think tank.

.. Ms. Warren estimates only 75,000 families would pay her tax, yet it would raise $2.75 trillion over 10 years.

..  It was barely a year ago that Republicans slashed the U.S. corporate tax rate to closer to international levels in hopes of juicing growth. A wealth tax would go in the opposite direction. For example, on an investment in a company averaging 8% annual returns, a shareholder may expect her holdings to grow 8% per year. A 3% wealth tax on that increase represents, on average, an implicit 37.5% income tax, on top of the corporate taxes

And unlike the corporate tax, it would have to be paid even if the company made no money that year.

.. That wouldn’t necessarily undercut growth, because the U.S. could turn to foreign savings to finance an investment. This, however, means foreigners would take a bigger share of U.S. income.

.. There may be more effective ways to tax wealth. A large chunk of capital gains are never taxed because shareholders bequeath shares to their heirs without selling them. President Barack Obama proposed in one of his budgets taxing unrealized capital gains at death. 

Adam Looney, a Brookings Institution economist who worked on the proposal, says it would have raised roughly $200 billion over a decade. Mr. Auerbach says taxation at death seems to have less effect on the saving of the wealthy than taxation during life.

.. An even better response would be to attack the concentration of economic power that results in monopoly-like profits by reducing barriers to competition. Competition policy, unlike tax policy, faces no trade off between equality and growth.