At the sixth Democratic debate in Los Angeles, California, presidential hopeful Sen. Elizabeth Warren (D-Mass.) declared that economists are “just wrong” when they say her proposal for an $8 trillion tax increase would hurt the U.S. economy.
According to CNS News, Warren responded, “Oh, they’re just wrong” when asked if her plan to raise taxes by $8 trillion over a decade would “would stifle growth and investment,” as top economists predict.
Warren has proposed a wealth tax equal to 2 percent of net worth above $50 million and 6 percent of net worth above $1 billion.
In her speech, Warren argued that she would use that money to provide universal child care, early childhood education for every baby from zero to 5 years, to increase the wages of child care workers and preschool teachers, and to pay off student loan debt.
Although the tax policies offered by the Democratic candidate’s campaign appear to contribute to a reasonable socioeconomic solution for the country, experts differ.
Analysts at the University of Pennsylvania projected that the senator’s proposed wealth tax, if implemented in 2021, would raise between $2.3 trillion (including macroeconomic effects) and $2.7 trillion (not including macroeconomic effects) in additional revenue in the 10-year window 2021–2030 while reducing GDP in 2050 by about 1 to 2 percent, depending on how the money is spent.
Indeed, the PWBM (Penn Wharton Budget Model) projects that if the additional revenues were spent on public investments, GDP in 2050 would fall by between 1.1 and 2.1 percent, depending on the productivity of the investment.
Average hourly wages in the economy in 2050, including wages earned by households not directly subject to the wealth tax, would fall between 0.8 and 2.3 percent due to reduced private capital formation.
Therefore, these results demonstrate that the Warren’s model is not reliable in having a positive impact on the U.S. economy.
Warren’s tax scheme is the most aggressive of all the Democratic candidates competing for the White House.
First her proposal targeted high-net-worth individuals earning between $50 million and $1 billion with a 2 percent tax, while households earning more than $1 billion would be taxed at 3 percent.
That model was then adjusted upward with a 4 percent annual Billionaire Surcharge (6 percent overall tax) on the net worth of households above $1 billion.
The final difference between the PWBM approach and Warren’s estimate is the assumption about the avoidance elasticity and its application. Warren’s estimate assumes a semi-elasticity of taxable wealth of -8. In contrast, PWBM’s semi-elasticity is -13, which implies more avoidance and therefore less income.
In addition, as data specialist Max Ghenis points out, Warren’s estimate seems to apply the elasticity at a rate of 2 percent for all taxpayers, even those who face the higher rate above $1 billion in net worth.