Saturday, August 22, 2020
John Diamond (Rice University) & George Zodrow (Rice University), The Economic Effects of Wealth Taxes:
In this paper, we estimate the economic effects of the wealth tax proposed by Senator Warren using a computable general equilibrium model of the U.S. economy under the assumption that all revenues are used to increase income transfers (excluding Social Security payments) that accrue primarily to lower income groups.
Our simulation of the Warren wealth tax estimates in the long run GDP falls by roughly 2.7 percent, as a result of decline in the capital stock of roughly 3.7 percent and in total hours worked of 1.5 percent, and aggregate consumption falls by 1.4 percent. Initially hours worked decline by 1.1 percent in a full employment economy; if instead labor hours worked per individual were held constant, this would be roughly equivalent to a loss of approximately 1.8 million jobs. Real wages decrease initially by 1.4 percent, but increase by 0.2 percent five years after enactment and by 1.3 percent in the long run. Together, the changes in real wages and the decline in hours worked imply that annual household real wage income on average across all wealth cohorts fall by $2,491 initially and by $1,129 five years after the reform. Five years after the reform, household real wage income falls by $4,487 for the lowest lifetime income group, by roughly $561 for the median household, and is unchanged for the top decile. In the long run, transfers relative to GDP increase by 70.1 percent, with most of the increase in transfers going to the bottom third of lifetime earners, whose average per-household transfer increases by $6,905. Per-household wealth held by the top lifetime income group (the top 0.25 percent) falls by 6.3 percent ($3.7 million), and per-household wealth of the fourth through ninth income deciles declines by 0.9 percent (roughly $440) to 4.2 percent (roughly $49,660), while the per-household wealth of the bottom three income deciles increases by roughly 19.0 percent ($100) for the lowest income decile, 10.7 percent (roughly $500) for the second lowest decile, and 1.8 percent (roughly $350) for the third lowest decile.