Part I: Billionaire Taxes, https://ssrn.com/abstract=3326615.
Part II: Taxes Spending and Innovation, https://ssrn.com/abstract=3335386.
How much can a passive investor with a high-risk tolerance earn on his or her capital?
If history since the end of World War 2 is any guide, between 11 and 14 percent per year before taxes and inflation. After inflation, this comes to around 7 to 10 percent. With good tax planning, the rate of return net of income taxes, inflation, and fees could average around 6.5 to 9.5 percent per year.
A family with $100,000,000 ($100 million) in wealth would pay an additional $1 million in taxes per year under Senator Elizabeth Warren’s ultra-high-net-worth tax proposal. That would reduce their after-tax disposable income to $5.5 million to $8.5 million per year.
To put this into context, according to the Survey of Consumer Expenditures, households in the top 10 percent of income earned an average of $189,000 after taxes and spent on average $143,000 in 2017. Even after paying Warren’s wealth tax, a household with $100 million in assets could spend 38 to 59 times as much as a relatively high-income household.
A household with a $100 million net-worth that lived modestly and spent only as much as the average household in the top 10 percent of income could reinvest $5.36 million to $8.36 million per year, growing their net-worth by 5.36% to 8.36% per year, on average. This is $5.32 million to $8.32 million more in annual savings than the average top-10 percent household.
The analysis above implies that Warren’s proposed 2% to 3% ultra-high net-worth wealth tax would only slightly slow the increase in high-end wealth inequality but would not halt or reverse it. At a 5.36% return after taxes, inflation, and personal consumption, a fortune would quadruple in value every 27 years, and would therefore not be dissipated by typical family growth rates. (At 8.36%, it would quadruple in value every 18 years).
Under Warren’s proposal, a household with $1 billion in wealth would pay an additional $19 million in taxes per year. After paying the wealth tax, other taxes, and reinvesting to stay ahead of inflation, our billionaire family would be still be able to spend approximately $46 million to $76 million per year, forever, without anyone in the family having to work a job. Every extra billion in wealth (above $1 billion) would translate into an additional $35 million to $65 million in disposable income per year, after taxes and fees and reinvesting to stay ahead of inflation.
If policy makers wanted to cap personal wealth from purely passive investing at $1 billion, but did not want to tax the first $50 million in wealth, they would have to annually tax wealth above $50 million at around 12%. Assuming effective enforcement, this would potentially generate somewhere in the vicinity of $1 trillion in revenue per year. This is about enough to replace most payroll tax revenue and thereby give every worker in the country a double digit percentage pay raise on their first $130,000 in earnings, or give every employer equivalent savings on labor costs.
A wealth tax of 5% to 10% per year would be similar to hurdle rates that are used to handicap hedge fund and private equity managers’ incentive compensation, rewarding wealth managers only when they produce returns that exceed what they should be able to accomplish with minimal skill and little effort. A similar ultra-high net-worth wealth tax rate might help distinguish persistently talented investors, leaders, or entrepreneurs from those whose growing wealth is the result of past success and good luck.
In contrast to such starkly meritocratic policies, Warren’s relatively modest 2% above $50 million and 3% above $1 billion wealth tax would preserve the freedom and security that come with family wealth by making available to passively invested ultra-wealthy households millions or tens of millions of dollars every year.
Law | Taxation-Federal | Taxation-Federal Estate and Gift | Tax Law
Date of this Version
Michael Simkovic, "After Paying Ultra-High Net Worth Wealth Taxes, How Much Would Billionaires Have Left to Live on?" (May 2019). University of Southern California Legal Studies Working Paper Series. Working Paper 291.