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America's regressive middle-class wealth tax

America's regressive middle-class wealth tax
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Sen. Elizabeth WarrenElizabeth WarrenCan Biden find a third way between Trumpism and Obama-era globalism? Left seeks to influence Biden picks while signaling unity Schwarzenegger says he would 'absolutely' help Biden administration MORE (D-Mass.) describes her proposed 2 percent annual tax on household net worth over $50 million as “brand new.” Her opponents concede the idea is new, saying that “the US has never had a wealth tax,” although they also call it “confiscatory,” “punitive” and “unfair.”

But wealth taxes in the U.S. are not new at all. Many middle-class Americans already pay wealth taxes far higher than the 2 percent rate Warren proposes. They are called property taxes. And compared to Warren’s plan, those local property-wealth taxes can be a lot less fair.

Suppose your only asset is a house worth $200,000 — slightly more than the median U.S. home. If you pay typical property taxes of 1 percent, that’s $2,000 each year in taxes. But if you’ve borrowed three-fourths of the money for the house, your net worth is only $50,000. So that $2,000 property tax bill amounts to 4 percent of your net worth. That's a 4 percent wealth tax. By contrast, a 2 percent wealth tax on super millionaires seems modest, even fair.

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Of course, property taxes tax only property, ignoring bank accounts, stocks, bonds and more exotic investments. That reduces their bite, especially for people with more than $50 million worth of assets. 

What are the real numbers? The median American homeowner in 2016, the most recent year of data from the Federal Reserve Board, had net worth of $231,000 and paid $2,000 in real estate taxes. That’s a 0.86 percent wealth tax. It’s smaller than the 2 percent wealth tax Warren has proposed. But it applies to tens of millions of middle-class families, not just people with more than $50 million. And it’s perversely targeted at homeownership, the one type of wealth politicians from both parties claim to favor.

Worse, that median property-wealth tax of 0.86 percent masks a deeper underlying unfairness. For the 10 percent of homeowners with the lowest incomes, property taxes amount to a wealth tax of 0.75 percent, or $750 for every $100,000 of assets. For the 10 percent of homeowners with the highest incomes, the property-wealth tax costs only a third as much, $266 for every $100,000 of assets.

We’re used to thinking about taxes as a share of income, not as a share of wealth. But that doesn’t make this look any fairer. The poorest 10 percent of homeowners paid $680 per year in property taxes in 2016, amounting to nearly 5 percent of their incomes. The richest 10 percent paid $7000, less than 2 percent of their incomes.

Before 2017 that unfairness was magnified by federal tax law. American homeowners used to be allowed to deduct local property taxes paid from their taxable incomes each April 15. For homeowners in the top federal income tax bracket of 40 percent and who itemized deductions, each dollar’s worth of local property taxes cost only 60 cents. The other 40 cents was offset by reduced federal income tax bills. Lower-income homeowners who paid lower federal income tax rates got lower benefits from deducting property taxes. And homeowners who took the standard deduction paid the full cost of local property taxes, with no federal subsidy. Kudos to the 2017 tax bill for eliminating all but $10,000 of this inequity.

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And finally, what about renters? They don’t pay property taxes directly, but their landlords do. If landlords pass along most of those tax costs in the form of higher rents, renters could easily be burdened by the highest wealth tax rates of all.

By contrast with property taxes, Warren’s proposed wealth tax – at least the 2 percent rate on wealth below $1 billion – seems modest and less tilted towards middle-class Americans. Not unfair at all, or even new.

Arik Levinson is a professor of economics at Georgetown University.