A new analysis from the Penn Wharton Budget Model finds that Elizabeth Warren’s proposed wealth tax would raise between $2.3 trillion and $2.7 trillion over 10 years, while reducing GDP in 2050 by about 1%. The revenue projection falls more than $1 trillion short of the $3.8 trillion estimate provided by the Warren campaign.
A key assumption: Much of the difference between the Penn Wharton estimate and the one from Warren is the result of divergent assumptions about how effectively the rich would try to avoid a wealth tax. Simply put, the Penn Wharton analysis assumes the rich will succeed in avoiding trillions of dollars in wealth taxes, while the Warren campaign argues that beefed-up enforcement at the IRS will sharply limit avoidance.
In its analysis, Penn Wharton showed just how big a difference the avoidance assumption makes: “Without any avoidance (legal or illegal) ... we project that the policy would raise $4.8 trillion between fiscal years 2021-2030. With ‘extreme avoidance’ ... that revenue estimate falls to $1.4 trillion.”
An added wealth tax raises almost nothing: In order to raise revenues for her Medicare-for-All proposal, Warren added an additional 3% wealth tax on billionaires to her fiscal plan, which imposes a 2% tax on household wealth over $50 million and now a 6% tax (up from her original 3%) on household wealth over $1 billion. But according to this chart from Gabriel Zucman, the economist who has helped shape the Warren tax plan, the Penn Wharton model sees very little extra revenue produced by that higher tax, due in large part to avoidance by billionaires.
An outdated model? Critics of the Penn Wharton model say that it leans too heavily on other assumptions about how the economy works, including the idea that higher taxes by definition reduce growth by shrinking the pool of available capital and driving up interest rates — effects that have been notably absent in recent years. “It feels like to me like they’re modeling the world of 1992, 1994,” said Simon Johnson, an economist at MIT who has advised the Warren campaign.
The bottom line: While much of the attention Thursday was on the revenue shortfall projected by the Penn Wharton analysis, the results suggest that Warren’s wealth tax would be a powerful revenue raiser nonetheless. “This is not nickels and dimes, even in our estimate,” said Penn Wharton’s Kent Smetters. “It’s nothing to sneeze at.”