Paul L. Caron

Saturday, August 22, 2020

The Economic Effects Of Wealth Taxes

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.

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Damn Gerald, you and I agree. I felt a shift in the force.

Posted by: Dale Spradling | Aug 23, 2020 6:26:25 PM

It would definitely be good to minimize the "spinning" that shows up in economic studies and articles. As for economics becoming a science, it'll never happen: too many uncontrollable variables, including the most uncontrollable of all: human beings.

Posted by: Gerald Scorse | Aug 23, 2020 11:33:38 AM

Ted: "But all else never remains equal."

People do read the news and change their behavior accordingly. And just an fyi on the 90% top marginal tax rate, very, very few households were ever subject to it, due to the fact that deductions were voluminous even back then. Effective tax rates were signficantly less, even for the wealthy. And, most importantly, the JFK/LBJ tax rate reductions in the 1960s actually made the federal tax code MORE progressive. That's a well-established fact using IRS data.

Posted by: MM | Aug 22, 2020 2:51:31 PM

Unfortunately, I have lost confidence in economic modelling in this area. All such studies say: "All else remaining equal, here's what will happen." But all else never remains equal. The models economists use today to predict the effect of taxes on growth, if applied to the 1950s and 1960s, would have predicted horrible outcomes. But in fact, notwithstanding top rates over 90%, growth then was the highest it's ever been since WWII. To be persuasive, models must first be validated against historical data. When historical data is fed into the models, the models must predict, relatively accurately, what actually happened. Otherwise, all we have are manufactured talking points. Economics has to stop being spin and start being a science.

Posted by: Ted Seto | Aug 22, 2020 10:28:00 AM