WASHINGTON—Democratic presidential candidate Elizabeth Warren has unveiled sweeping tax proposals that would push federal tax rates on some billionaires and multimillionaires above 100%.
That prospect raises questions for taxpayers and the broader economy that experts are starting to ponder: Under which circumstances would taxpayers have to pay those rates? How might that change their behavior? And would investment and economic growth suffer?
Potential tax rates over 100% could result from the combination of tax increases the Massachusetts senator proposes for the very top tier of investors. She wants to return the top income-tax rate to 39.6% from 37%, impose a new 14.8% tax for Social Security, add an annual tax of up to 6% on accumulated wealth and require rich investors to pay capital-gains taxes at the same rates as other income even if they don’t sell their assets.
Consider a billionaire with a $1,000 investment who earns a 6% return, or $60, received as a capital gain, dividend or interest. If all of Ms. Warren’s taxes are implemented, he could owe 58.2% of that, or $35 in federal tax. Plus, his entire investment would incur a 6% wealth tax, i.e., at least $60. The result: taxes as high as $95 on income of $60 for a combined tax rate of 158%.
The rate would vary according to the investor’s circumstances, any state taxes, the profitability of his investments and as-yet-unspecified policy details, but tax rates of over 100% on investment income would be typical, especially for billionaires.
“It’s just a continuing laundry list of proposals that just keep heaping on,” said Robert Gordon of Twenty-First Securities Corp., an investment advisory firm.
Ms. Warren’s tax plans, aimed at paying to expand health care, child care, housing and education programs, are the clearest expression of progressive Democrats’ fiscal philosophy. They lean heavily on taxes at the top of the income and wealth scale to finance these expanded programs.
Such moves would bring the U.S. closer to other industrialized nations in the level of taxation, but without the high taxes on retail sales that most use to finance social spending.
“We can do all of this with new taxes on financial firms, giant corporations and the richest 1% of Americans,” said Saloni Sharma, a Warren campaign spokeswoman.
Ms. Warren has talked most about her plan, announced in January, to impose a 2% annual tax on wealth above $50 million and 3% above $1 billion, which she doubled to 6% this month to pay for Medicare for All. Sen. Bernie Sanders of Vermont, a rival for the nomination, proposed a similar tax.
Other Democrats champion a less radical approach to taxing wealth but one that would still raise taxes sharply at the top.
Currently, capital gains are taxed only when an asset is sold and the gain is “realized,” and those gains escape income taxes at death. That means gains on assets that never sold are never taxed, so fortunes can grow without triggering any income taxes.
Instead of a wealth tax, presidential candidates Sen. Cory Booker (D., N.J.) and Julián Castro, along with Sen. Ron Wyden (D., Ore.), have proposed taxing capital gains annually based on asset values, even if not sold. Ms. Warren would do both, combining that capital-gains change with the wealth tax.
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Under current law, investors without dividends can add their annual gains to their fortunes and pay little or no income tax. After Ms. Warren’s one-two punch, some billionaires who generate pretax returns could pay annual taxes that would leave them with less money than they started with.
That isn’t an unintended consequence. For progressive-tax advocates, breaking up concentrated wealth is a goal.
Beyond the estimated 75,000 households that would be hit by the wealth tax, Ms. Warren’s capital-gains plan would transform investing rules for the top 1%—about 1.5 million households.
Under Ms. Warren’s plan, their unrealized capital gains outside retirement accounts would be taxed at 39.6%, just like ordinary income, plus an existing 3.8% investment-income tax. Add to that her new 14.8% investment-income tax to bolster Social Security, and state taxes, and combined tax rates could reach 70% in California and New York City.
The effective tax on business investment could actually be higher because these personal taxes would come after a company has already paid a corporate tax rate, under Ms. Warren’s plan, of 42%, up from 21% now.
Economists generally think taxes on profits, capital gains and dividends discourage investment and hurt economic growth. In this case, the effect is unclear because companies could still attract investment from individuals, foreigners and tax-advantaged retirement funds, pensions and endowments that aren’t subject to Ms. Warren’s wealth, capital-gains or personal-income taxes.
The Penn Wharton Budget Model, a research group, estimates in a preliminary report that a 3% wealth tax above $50 million, which isn’t exactly Ms. Warren’s plan, would reduce the growth rate of gross domestic product over the next decade by an annual average of 0.2 percentage point and the capital stock—all the equipment, structures, and intellectual property that companies employ—by 4.3%.
Bharat Ramamurti, a Warren aide who helped develop her tax plans, criticized the report on Twitter, noting that it assumes different uses of the revenue and describing it as meaningless.
Even if Ms. Warren wins, she is unlikely to turn her entire agenda into law because of obstacles in Congress and possibly the courts. Still, for the wealthiest investors, the plans are a warning that basic rules of the road may change.
To keep their fortunes from falling, billionaires would have to find higher-returning investments. They would, red-queen style, have to run faster to stay in place. Some could shift to municipal bonds if those remain tax-exempt.
But higher returns would almost certainly come with greater risk. Moreover, “If billionaires knew that there was high-return stuff out there, they probably already would have their money in it,” said Kyle Pomerleau, until recently a tax analyst at the conservative Tax Foundation.
There are unresolved questions surrounding the capital-gains plan, such as the rules for assets other than publicly traded securities. Ms. Warren estimates her tax on unrealized gains would raise $2 trillion over 10 years, citing New York University professors Lily Batchelder and David Kamin.
The professors assume that publicly traded securities would be taxed each year. Everything else—real estate, privately held businesses, artwork—would be taxed when sold, or at death. At that point, investors would also pay a deferral charge to compensate for the financial benefit of not having to pay tax over the entire holding period.
For rich taxpayers exempt from the wealth tax, that would remove the compliance burden of valuing every private business and beach house every year.
Measuring taxes across decades could be tough for states. Consider someone who had a business in New York but didn’t sell it and trigger capital-gains taxes until he was a Florida resident.
Lawmakers would have to decide whether to exempt residences, how to set wealth and income-exemption levels and whether to refund capital-gains taxes to investors whose fortunes drop.
“It is in campaign mode, and there are a lot of questions still to be resolved,” said Greg Leiserson, director of tax policy at the Washington Center for Equitable Growth, a progressive group. “They are resolvable.”
Write to Richard Rubin at richard.rubin@wsj.com
Corrections & Amplifications
Bharat Ramamurti is a Warren aide who helped develop her tax plans. An earlier version of this article incorrectly said he was Elizabeth Warren’s policy director. ( Nov. 15, 2019)
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