Critics have assailed Sen. Elizabeth Warren’s (D-Mass.) proposed wealth tax as an anti-American assault on economic dynamism that would hurt growth. This week, they seemed to get a boost from The New York Times, which reported that the first independent analysis of Warren’s tax found it would indeed slow investment.
Or did it?
The fact is, the analysis cited by the Times is riddled with problems, from its practical assumptions to the entire economic theory behind the model.
First off, the basics: The projection came from the Penn Wharton Budget Model — basically a computer model of the economy that takes something like a new tax and tries to game out how the economy would react. In this case, they modeled Warren’s call for a 2-percent annual tax on all stocks of wealth — a person’s total bundle of real estate, corporate shares, yachts, etc — above $50 million, and a 3-percent annual tax on all wealth over $1 billion. (Incidentally, Warren wants to hike the latter charge to 6 percent to help finance her Medicare-for-All proposal, but that wasn’t modeled.)
The result? “Annual economic growth would slow from an average of 1.5 percent to an average of just over 1.3 percent over a decade,” the Times reported. “Wealthy Americans would consume more and save and invest less in order to avoid accumulating wealth that would be subject to the tax. The resulting drop in investment reduces economic growth.”
Even on the face of it, you might not consider that drop a huge deal. But it did seem to confirm the general story that high taxes on the wealthy erode the engine of U.S. job creation. It was also effectively a knock on Sen. Bernie Sanders (I-Vt.), who’s also in the race for the Democratic presidential nomination along with Warren, and who has proposed an even more aggressive version of Warren’s idea.
Okay, so why was this analysis bunk? Why is the story it told not actually true? Three overlapping reasons.
First, the analysis assumes Warren will use the revenue from her tax to pay down the deficit. But Warren has explicitly said she wants that tax to offset new spending on things like student debt cancelation and a universal child care system. Those sorts of broad-based programs are going to put more money into everyday people’s pockets. And those people will be more likely to spend that extra money into …read more
Source:: The Week – Politics