Sen. Elizabeth Warren's proposed wealth taxes would shrink the U.S. economy by 0.9% to 2.1% by 2050, bring down capital stock formation rates and depress average hourly wages, according to a model developed by researchers at the University of Pennsylvania - The Wharton School.
The Massachusetts Democrat is campaigning for president with a platform that includes a 2% tax on net worth above $50 million and a 6% tax on net worth above $1 billion, which the senator plans to use for universal healthcare, tuition-free college and student debt relief.
The Penn Wharton Budget Model, or PWBM, found that the economic impact of the tax plan would depend on how the money would be spent. The PWBM's best-case scenario assumes that wealth tax revenue is spent toward paring down the federal budget deficit, which would normally increase national savings and capital accumulation. However, rich households targeted by the tax plan are expected to add less to their asset holdings over time. This would result in a 2.5% drop in total capital stock, a 0.8% decline in hourly wages and a 0.9% reduction in GDP by 2050, according to the model.
"A wealth tax doesn't just affect the billionaires: It has a broader impact on everybody because those billionaires are investing in companies that employ everybody," PWBM faculty director Kent Smetters said in an interview with CNBC.
Warren's campaign team hit back on the study, with deputy press secretary Saloni Sharma saying the analysis "does not study Elizabeth's actual plans — it does not account for the strong anti-evasion measures in her wealth tax and does not even attempt to analyze the specific investments Elizabeth is committed to making with the wealth tax revenue," CNBC reported.
If wealth tax revenues are spent on government programs that do not increase worker productivity, total capital stock could fall by 6.5%, wages would drop 2.3%, and GDP would be reduced by as much as by 2.1% by 2050, the model found.
Using tax collections from wealthy households to fund government programs that increase worker productivity could mitigate the economic impact of the tax, the PWBM found. While total capital stock would fall by 5.6% and hourly wages would still see a 1.1% decline, a 0.8% boost in total factor productivity could help lessen the hit to GDP to a 1.0% decrease by 2050, the PWBM added. The study cited early childhood education, infrastructure development and additional healthcare spending as public investments that could boost workers' productivity.
The model also found that Warren's tax plan might produce less revenue than expected. Warren's campaign projects the proposed wealth tax would generate $3.75 trillion from 2021 through 2030. Factoring both legal and illegal tax avoidance, the PWBM estimated expected tax revenues to be closer to $2.7 trillion in 10 years.