There are a variety of explanations offered for that state of public opinion, but the one that may be most compelling leads straight into behavioral economics and the well-documented phenomenon called the “endowment effect.” In plain language, the endowment effect holds that it hurts more to lose something you’ve got than to miss out on an equivalent benefit you might want.
If you’re fortunate enough to earn $1 million a year in salary and it’s taxed by the feds at the current top marginal rate of 37 percent, you may grumble about it, but the odds are you won’t agonize very long. But if you have $1 million worth of money and non-financial assets and the feds or your state want to tax any of it, even at a much lower rate, you’re likely to feel that the government is taking something you deserve to keep. Your wealth is an endowment — most Americans believe that, even those who don’t have a whole lot to endow. We just seem to be wired that way. Texas voters approved a constitutional amendment in 2023 declaring a wealth tax illegal.
Still, there’s a whole cadre of economists and public officials who think that wealth as well as income ought to be taxed, as a matter of fairness and as a way to raise badly needed public revenue. So the idea of imposing a wealth tax never quite disappears from public debate. It’s re-emerging now in Washington state, where outgoing Democratic Gov. Jay Inslee recently offered one for the Legislature to consider. Quite a few Democrats seemed interested; Republicans generally hated it.
Inslee’s plan would impose no burden on the vast majority of Washington taxpayers. It would impose a levy of 1 percent on residents who possess global wealth of $100 million — roughly 3,400 of the state’s citizens. Inslee has claimed his tax would raise more than $10 billion over four years, with the proceeds targeted for child care, health and education.
The Inslee plan is a repackaging of the much more widely discussed wealth tax that was a centerpiece of the 2020 Democratic presidential campaign of Massachusetts Sen. Elizabeth Warren. She wanted a tax of 2 percent on assets of more than $50 million and 6 percent on the holdings of billionaires.
Warren’s campaign didn’t get very far, and the wealth tax didn’t get anywhere at the time. But it did have an indirect effect in Massachusetts. In 2022, the state’s voters approved a ballot measure creating a 4 percent surtax on incomes — not wealth, but incomes — of over $1 million. That measure didn’t challenge the endowment effect the way her 2020 wealth tax proposal would have.
SO THE IDEA OF PLACING NEW BURDENS ON LARGE FORTUNES hasn’t exactly gone away. If you look overseas, you’ll find that it exists in a few places, although mostly in a relatively modest form. France has had a wealth tax, but its returns have been meager, and it was cut back substantially in 2017. Germany abolished its wealth tax in 1997, although it is debating its reintroduction. The only existing wealth tax that has brought in a significant share of money is the one in Luxembourg, but portions of that were invalidated by a court in 2023.
In any case, the number of countries with a wealth tax is shrinking rather than growing. There were 12 of them back in the 1990s; the number is now down to five. Finance managers in several countries have said the revenue gain from a wealth tax is too small to justify the administrative work required. Of course, that depends to some extent on how heavy the tax is. For Luxembourg, it clearly has been a significant money-raiser.
When Warren came out with her wealth tax proposal in 2020, the Tax Foundation estimated that it would bring in about $2.6 trillion over 10 years. Later, a study conducted by the Wharton School at the University of Pennsylvania found that such a tax could reduce GDP by 0.9 percent in the year 2050. That study’s authors wrote that “wealthy households that face a tax on their savings choose to accumulate less capital,” thus likely making the entire economy less productive.
This assumes that rich people would be influenced to change their behavior significantly when faced with a 2 percent tax on their holdings above $50 million. It’s a speculative assumption, no matter what the model predicts.
EVEN MORE SPECULATIVE is the notion that wealthy individuals would move out of any jurisdiction that chose to implement a wealth tax. Critics of the idea have made this a core tenet of their opposition. When Inslee came out for a wealth tax in December, the Seattle financier Nick Hanauer tweeted that “every wealthy person I’ve spoken to in the last few days has said they will leave the state” if the tax were to be enacted.
Hanauer presumably knows more about finance than I do, but if I had $50 million I don’t think I would pack up and move away to avoid a 2 percent surcharge. The evidence in this country suggests that people may avoid moving to a state if its taxes are on the high side, but few actually leave if the rate goes up a couple of points. Still, wealth tax advocates are sensitive to this issue. In 2024, Warren added to her tax plan a 40 percent “exit tax” on anyone worth more than $50 million who attempts to renounce U.S. citizenship to avoid paying up. This wouldn’t prevent anyone from moving from one state to another; I just question how much of it would actually happen.
Of course, one could stay at home and simply move capital assets to another jurisdiction or another country. This is one more obstacle that wealth tax advocates have to confront. How big the capital flight problem might be is hard to estimate. But it’s also hard to dismiss.
A MORE SERIOUS OBSTACLE to a substantial wealth tax might be the difficulty of assessing the value of wealth that isn’t in financial holdings. It’s been estimated that as much as 60 percent of the wealth of the richest 1 percent of Americans is in non-financial holdings — automobiles and boats, real estate, private businesses. How do you value these things before they are sold? How do you value someone’s art collection? Presumably some of the European countries have found answers to this problem, but it's not an easy one to solve. Dan Savickas, director of policy at the Taxpayers Protection Alliance, ridiculed the Warren plan as painting “a fictional ‘Scrooge McDuck’ image of these billionaires storing their own money in large swimming pools, just laying around.”
He has a point. One suggestion for getting around it would be to limit the wealth tax to stocks and bonds, which are easy enough to value. Another Washington state proposal would impose a 1 percent wealth tax but limit it to financial instruments.
Notwithstanding all these difficulties, the fact remains that a wealth tax similar to the ones offered by Elizabeth Warren or Jay Inslee would bring strapped governments a substantial amount of money to spend on health, education and climate relief, among other things. Will Americans ever go for one?
That question leads back to the endowment effect, and the fact that many people oppose wealth taxes who don’t stand the remotest chance of ever accumulating enough wealth to qualify for one. When Texas voted by more than 2 to 1 against wealth taxes in 2023, it wasn’t billionaires who made that decision. It was Texans who drove trucks, worked in convenience stores and taught in schools for relatively low pay. The fact is that to most of us, wealth isn’t just something we ourselves have accumulated. It’s also something other people have accumulated, and taking even a small portion of it away from them seems less fair than increasing the levy on income as they receive it.
Someday we may decide that given the revenue government needs to operate effectively, a wealth tax isn’t such a bad idea. But the idea doesn’t seem to be on the horizon just yet.
Governing’s opinion columns reflect the views of their authors and not necessarily those of Governing’s editors or management.
