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How Elizabeth Warren's wealth tax would work

One of Massachusetts Senator Elizabeth Warren's key proposals is a tax on the ultra-rich to pay for some of her big-ticket promises. The idea has support but also a long line of critics who question whether it's practical, effective and even legal.

It promises to raise trillions of dollars, but can a wealth tax overcome legal and practical hurdles?

Massachusetts senator and Democratic presidential hopeful Elizabeth Warren has made a wealth tax one of the central planks of her platform. (Justin Sullivan/Getty Images)

One of the key planks of Massachusetts Senator Elizabeth Warren's presidential election platform is a tax on the wealthiest families in the United States. 

Dubbing it the "Ultra-Millionaire Tax," her campaign says it would help make the tax system more progressive and fair, and would raise trillions of dollars.

Warren's goal is to reach deeper into the pockets of the wealthy to fund some of her campaign promises. But the idea faces stiff criticism, not only about whether it can work but also whether it's even allowed under the U.S. Constitution. 

Here's a breakdown:

What is a wealth tax? 

It's not a tax on income alone. As the name suggests, a wealth tax is instead a tax on everything a person or household would use to calculate their net worth: bank accounts, real estate, stock holdings, personal trusts, assets in insurance and pension plans, and more, after deducting liabilities like a mortgage. 

According to the economists who support a wealth tax, the current federal taxation system doesn't address the biggest aspect of inequality: beyond the wage gap, it's the disparities in wealth that are much more pressing.

To illustrate that point, the economists who helped Warren craft her proposal estimate that one per cent of high-income-earning Americans make about one-fifth — or 20 per cent — of the total income in the United States. That number changes drastically when measuring wealth distribution: the top one per cent of wealth holders own 42 per cent of overall wealth. 

How would it work? 

Here's how Warren's wealth tax proposal breaks down: 

A two per cent tax on individuals whose net worth is more than $50 million (all figures US). 

The tax goes up to six per cent for a net worth of $1 billion and up.  

According to economists Emmanuel Saez and Gabriel Zucman, who advised the Warren camp, the tax would affect the top 0.1 per cent, or about 75,000, households. They say because so much wealth is concentrated among this group, the tax would raise an estimated 3.75 trillion in revenue over a 10-year period. 

Warren wants to use the money raised through the wealth tax to fund many of her big-ticket proposals: Medicare-for-all, tuition-free public college, a universal child-care program and abolishing student debt. It would also fund Warren's $800-billion public school education plan

How would it be enforced?

One of the biggest obstacles to a wealth tax is that a family's wealth can be hard to measure because it can include items like shares in a privately held company. Critics argue the wealthy will simply dodge the tax by moving assets offshore or renouncing their citizenship. These were the types of problems that led a number of European countries to drop their wealth tax.

Proponents argue that the Internal Revenue Service does have the infrastructure in place to assess wealth — something it does to apply the estate tax upon an individual's death. The Warren proposal includes measures that would increase the IRS budget, implement audits for those eligible for the wealth tax, and levy a 40 per cent "exit tax" on net worth above $50 million on anyone who renounces their American citizenship.

Is it legal? 

This is the biggest sticking point in the wealth tax discussion, and one that could tie the tax in legal knots before a single dollar is collected. The debate is over the language in the U.S. Constitution in the articles that describe how taxes are administered and distributed.

Scholars argue the wealth tax falls within Congress's power to levy taxes for the general welfare of the country, while others argue it's what is referred to as a direct tax, which must be equally distributed among the states based on population.

The Warren campaign has scholars who argue the tax is constitutional, pointing to studies that make the case. Even the American Bar Association agrees. For those who think it's unconstitutional, there's a long list of precedent-setting court cases to argue over.

Can it deliver as promised?

A number of experts have questioned the research underpinning Warren's plan and whether it will bring in the vast sums predicted. Perhaps the most pointed and devastating critique came from economist Larry Summers, who was treasury secretary under Bill Clinton and president of the National Economic Council under Barack Obama.

He said he used Zucman and Saez's algorithm to determine his net worth and "it was not within a country mile of reality either in toto or on a category-by-category basis." 

Summers said the tax would bring in less than half of what the campaign has projected. Instead, he says, more money could be raised by closing loopholes in the current tax system. Warren is actually on board with this idea and included tax reform in her Medicare-for-all plan, estimating it would raise $2.3 trillion.

His critique prompted Saez to concede that he and Zucman may have gotten some of their numbers wrong but that their book, The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay, released earlier this month, still makes the case for the tax. He and Saez have sparred publicly over the numbers, at conferences and on Twitter. 

Will the rich pay?

Warren's idea certainly has made some wealthy individuals nervous. As one former Goldman Sachs executive put it, "This is the f---ing American dream she is shitting on." Billionaire Michael Bloomberg is no fan, and the Washington Post has expressed concerns.

But there are a number of ultra-wealthy individuals who are on board with the idea.

Warren Buffet, the billionaire investor, has famously said he should pay more, lamenting a system that allows him to pay less in income tax than some of his employees. And earlier this year a group of billionaires including philanthropist George Soros and Disney heir Abigail Disney expressed their support for a "moderate" wealth tax in an open letter to all presidential candidates, saying, "America has a moral, ethical and economic responsibility to tax our wealth more."

About the Author

Steven D'Souza

CBC News New York

Steven D'Souza is a Gemini-nominated journalist based in New York City. He has reported internationally from the papal conclave in Rome and the World Cup in Brazil, and he spent eight years in Toronto covering stories like the G20 protests and the Rob Ford crack video scandal.