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Prominent economists make case for wealth tax in new paper

Two prominent economists who have advised several presidential campaigns released a new paper on Thursday making the case for a wealth tax as the issue continues to receive attention in the Democratic primary.

"The wealth tax is likely to be the most direct and powerful tool to restore tax progressivity at the very top of the distribution," University of California, Berkeley professors Emmanuel Saez and Gabriel Zucman wrote in a 66-page conference draft for the Brookings Papers on Economic Activity.

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Several Democratic presidential candidates — including Sen. Elizabeth WarrenElizabeth WarrenThe Memo: The center strikes back Centrists gain foothold in infrastructure talks; cyber attacks at center of Biden-Putin meeting Democrats have turned solidly against gas tax MORE (D-Mass.), New York City Mayor Bill de BlasioBill de BlasioAdams, Wiley lead field in NYC mayoral primary: poll New York City moving thousands of people from hotels back to shelters The Hill's Morning Report - Dems to go-it-alone on infrastructure as bipartisan plan falters MORE and billionaire philanthropist Tom SteyerTom SteyerTop 12 political donors accounted for almost 1 of every 13 dollars raised since 2009: study California Democrats weigh their recall options Why we should be leery of companies entering political fray MORE — have called for a wealth tax as a way to reduce inequality and raise revenue to pay for their spending priorities. Warren in January proposed a tax of 2 percent on households' net worth above $50 million and 3 percent on net worth above $1 billion.

When Warren released her wealth tax proposal, she released an estimate from Saez and Zucman that found that her proposal would raise $2.75 trillion over 10 years.

The two economists have spoken to several campaigns about wealth taxes, some of whom have put out plans and others that are still thinking about the issue, Zucman said in an email to The Hill.

In their new paper, Saez and Zucman estimated that if a wealth tax along the lines of Warren's proposal had been in place since 1982, the share of total wealth owned by Forbes magazine's 400 richest Americans would have been around 2 percent in 2018, instead of 3.5 percent.

"Wealth among the Forbes 400 has grown about 4.5 percentage points faster annually than average since 1982," the economists wrote. "A wealth tax of 2 or 3% per year can put a significant dent into this growth rate advantage."

Saez and Zucman also used their new paper to respond to several criticisms of wealth taxes that have been made by both left- and right-leaning policy wonks.

Some critics note that many European countries have gotten rid of their wealth taxes. 

Saez and Zucman said that the weaknesses of those taxes were that European countries were exposed to tax evasion through offshore accounts, the taxes had low exemption amounts and the taxes hadn't been modernized. The economists argued that "a modern wealth tax can overcome these three weaknesses."

Another criticism of wealth taxes is that they wouldn't raise as much revenue as Saez and Zucman think they would. Larry Summers, a former economic aide to Democratic presidents, and University of Pennsylvania professor Natasha Sarin are among those who have estimated that Saez and Zucman's revenue estimate of Warren's proposal is too high.

Saez and Zucman, however, criticized the methodology that Summers and Sarin used in their estimate.

The Berkeley economists also responded to critics who argue that a wealth tax would reduce the capital stock in the economy and the productivity of U.S. workers. They argued that a reduction in domestic saving could be offset by increased foreign investment in the U.S. and that increased savings from non-wealthy people could offset any decline in capital stock caused by a tax that only applies to the rich.

Saez and Zucman issued a caveat that wealth taxes are "fragile and susceptible to being undermined."

"The left could undermine its political support by lowering the exemption threshold too much and creating hardship for the illiquid merely rich," they wrote. "The right could then undermine its effectiveness by providing exemptions (and hence loopholes) for certain asset classes, or by imposing tax limitations based on income."