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The Great Wealth Tax Debate

Inequality is back at the forefront of economic policy debates, for good reason. A wealth tax is no panacea, and not even an ideal response to growing inequality at the top. But absent a better alternative, it can serve as a reasonable second-best policy.

WASHINGTON, DC – In 1990, 12 advanced economies had a tax on household wealth. Now only four do, after French President Emmanuel Macron scrapped his country’s version in 2017. Yet, a fierce debate has erupted in the United States over the proposal by Senator Elizabeth Warren, a leading Democratic presidential candidate, to introduce a tax of 2% on the wealth of “ultra-millionaires” (and 3% on that of billionaires).

In a new book, economists Emmanuel Saez and Gabriel Zucman of the University of California, Berkeley, who have advised Warren, claim that her tax would tackle growing wealth concentration in the US and yield some $250 billion per year, or 1.2% of GDP. But critics such as Larry Summers, a former US Secretary of the Treasury under President Bill Clinton, and Greg Mankiw, who served as President George W. Bush’s chief economic adviser, argue that a wealth tax would yield little revenue, distort investor behavior, and fail to curb the billionaires’ power. The ongoing controversy over the wealth tax is bound to be a defining one for the Democrats.

The starting point of this debate is fairly clear. As Lucas Chancel of the Paris School of Economics noted at a recent conference on combating inequality organized by the Peterson Institute for International Economics, the increase in wealth concentration is unmistakable, at least in the US. According to Saez and Zucman, the top 1% of US households now own 40% of the country’s wealth, while the bottom 90% hold only one-quarter. Since 1980, the 1% and the 90% have traded places.

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