Tax and Fiscal Policy

Are tax rates in excess of 100% making a comeback?

Economist and inequality guru Thomas Piketty, who advised the former French Prime Minister Francois Hollande on the introduction of his 75% supertax on millionaires, has repeatedly expressed his enthusiasm for Elizabeth Warren’s tax plans.

In the German Die Zeit magazine, Piketty crows that the two economists who wrote Warren’s economic programme are his close friends and allies. “The schedule proposed [by Warren] could still be extended and made more progressive with rates rising for example to 5–10% per annum for multibillionaires. What is certain is that the issue of fiscal justice will be central to the presidential campaign in 2020. The representative from New York, Alexandria Ocasio-Cortez has suggested a rate of 70% on the highest incomes, while Bernie Sanders defends a tax rate of 77% on the highest inherited estates. While the Warren proposal is the most innovative, the three approaches are complementary and should be mutually beneficial.” So much for Thomas Piketty.

A tax rate of over 100%

Warren wants to raise income tax, impose a new 14.8% tax for Social Security, add an annual tax of up to 6% on accumulated wealth, and tax the capital gains of wealthy investors at the same rate as income even if they don’t sell their assets.

The Wall Street Journal recently published the following calculation: “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, state taxes, the profitability of his investments and as-yet-unspecified policy details. But tax rates of over 100% on investment income would become feasible, especially for billionaires.

Sweden: Astrid Lindgren paid a marginal tax rate of more than 100%

A tax rate of more than 100% might sound absurd but, in reality, it is nothing new. In fact, Sweden experimented, and failed, with such radical socialist policies in the 1970s, alienating even those who were sympathetic to the Social Democrats’ project. Astrid Lindgren, the world-famous author of a raft of children’s classics, including the Pippi Longstocking series, is just one example. In the 1930s, she had become a supporter of the Social Democrats, partly in response to the books she read by working-class authors. Her long-standing commitment to social democratic beliefs was clearly evident in the words of the likeable newspaper editor with a strong sense of justice who plays a central role in her Madicken books. Nevertheless, none of this stopped her from feeling outraged by the 102% marginal tax rate levied on her earnings in 1976.

Lindgren vented her anger by writing a satire on the Swedish tax system titled “Pomperipossa in Monismania,” which was serialized in one of Sweden’s leading tabloid newspapers, Expressen. In response, Sweden’s minister of finance, Gunnar Sträng, added insult to injury during a session in parliament, saying: “The article is an interesting combination of stimulating literary ability and deep ignorance of the maze of fiscal policy. But we don’t expect Astrid Lindgren to understand that.” He suggested that Lindgren must have got her sums wrong to arrive at the figure of 102%. Lindgren retorted: “Gunnar Sträng seems to have learned to tell stories, but he sure can’t count! It would probably be better if we swapped jobs.” Eventually, Sweden’s prime minister, Olof Palme, stepped in to take control of the matter himself, admitting on television that Lindgren did have her numbers right.

Sweden drove its most famous artists into exile

Just one month after Lindgren’s “Pomperipossa” was published, the renowned Swedish film director Ingmar Bergman, winner of the Cannes Film Festival’s Palm of Palms award, announced his intention to leave the country following a dispute with the tax authorities. In late January, two plainclothes police officers had shown up at the Royal Dramatic Theatre in Stockholm to interview him. “I hope he shows up, otherwise things will get serious for him,” one of the policemen told the receptionist. Bergman was taken to the police station, where he was interviewed for several hours. While he was being grilled by the police, his home and office were searched and his passport confiscated. The arrest made headlines around the world.

Astrid Lindgren went on record to support the film director, who – like her – had fallen foul of Sweden’s excessive marginal tax rates. The minister of finance remained unrepentant, insisting that ‘cultural workers’ were subject to the same laws as everyone else. The allegations against Bergman were subsequently dropped due to lack of evidence. The public prosecutor who had initiated the proceedings received a disciplinary warning and Bergman was cleared of any wrongdoing. He fell into a severe depression and had to be hospitalised. His subsequent decision to leave Sweden was partly motivated by insinuations that the tax authorities hadn’t finished with him. Bergman and his wife moved to Paris (yes, that Paris), where they were greeted by a large crowd of journalists. Sweden had succeeded in driving its best-known living artist into exile.

Sweden has long since rejected such policies. Income taxes are still high by international standards, but there is no inheritance tax and no wealth tax. With her tax plans, Elizabeth Warren wants to turn America into a country where the wealthy pay marginal tax rates of more than 100%. What Warren fails to recognise is that the people she is targeting will leave the country – just as many successful Swedes did when faced by similar punitive taxes. It would be a strange turn of events if the US, of all places, tried to out-Sweden Sweden.

2 thoughts on “Are tax rates in excess of 100% making a comeback?”

  1. Posted 18/12/2019 at 05:30 | Permalink

    Are you sure US billionaires would leave the country? Remember, the US taxes its citizens globally. The only way for a US citizen to avoid US tax is the difficult process of renouncing citizenship.
    It’s different in the UK of course and higher tax, on income or indeed wealth, is a common driver behind high earners moving overseas at significant cost to the Exchequer. That is one reason why Land Value Tax is such a sound, if instinctively unpopular, idea.

  2. Posted 23/12/2019 at 08:38 | Permalink

    US expats will still be liable to any federal taxes if nonresident. They can however avoid state taxes. In order to avoid federal taxes the taxpayer would need to renounce their citizenship- a lengthy process that also involves a hefty exit tax. However billionaires are mobile and could easily source a secondary citizenship which means, over time, there would be a drift of the wealthy away from the USA.

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