Some investors could see their rates exceed 100 percent under Democratic presidential candidate Sen. Elizabeth Warren's tax plan, according to an analysis reported by the Wall Street Journal on Friday.
The Journal says the rates exceeding 100 percent would target top tier investors and result from a combination of different taxes the presidential hopeful is pitching. For instance, Warren is calling for raising the top marginal rate on income taxes to 39.6 percent, a 14.8 percent tax on Social Security, and an annual tax of six percent on accumulated wealth.
Presumably, this would all be in addition to state taxes and her pledge to hike capital gains taxes to much higher ordinary income tax levels.
Consider a billionaire with a $1,000 investment who earns a 6% return, or $60, received as a capital gain, dividend or interest. If all of Ms. Warren's taxes are implemented, he could owe 58.2% of that, or $35 in federal tax. Plus, his entire investment would incur a 6% wealth tax, i.e., at least $60. The result: taxes as high as $95 on income of $60 for a combined tax rate of 158%.
The rate would vary according to the investor's circumstances, any state taxes, the profitability of his investments and as-yet-unspecified policy details, but tax rates of over 100% on investment income would be typical, especially for billionaires.
Warren argues the taxes are necessary to pay for her litany of proposals, including Medicare for All, free college tuition, and public housing.
Her plan would hurt economic growth
Numerous economists have criticized Warren's tax proposals as excessive in recent weeks.
An analysis from the University of Pennsylvania's Penn Wharton Budget Model estimates that her wealth tax alone would reduce the country's economic growth by 0.2 percent each year over the next decade. The study found that annual growth would average out to 1.3 percent instead of 1.5 percent.
Slower economic growth would impair the government's ability to pay for critical spending priorities such as defense, which Warren has pledged to cut by 12 percent. Another possible byproduct of Warren's tax plan is that it could trigger a flight in capital and force investors to pull their stock market investments, which may plunge the markets and hurt 401(k) retirement plans, among other things.
As economist and wealth tax expert Edward Wolff has said, the plan is "going to induce a big capital flight out of this country," adding "Who is going to sit around and see their wealth earning nothing or even in negative territory?"
Even some Democrats agree
Another critic of Warren's wealth tax is former economist Larry Summers, who worked in the Obama and Clinton administrations. "We do need to study pretty carefully why it is that most of the European countries, who usually are more progressive than we are and had wealth taxes, have decided over the last 15 or 20 years to eliminate those wealth taxes and why almost none of them get anything like the kinds of revenue that Sen. Warren is aspiring to get," he told CNBC in January.
Meanwhile, in comments that were unmistakably directed at progressives like Warren and Sen. Bernie Sanders (D-Vt.), former President Barack Obama said on Friday that 2020 Democrats' progressive proposals could alienate voters.
"Even as we push the envelope and we are bold in our vision, we also have to be rooted in reality," Obama said. Adding, "the average American doesn't think we have to completely tear down the system and remake it."