Warren’s wealth tax to hurt US investors

According to Elizabeth Warren, economists who say that her proposed wealth tax would stifle investment and growth are “just wrong.” Leaving aside the question of whether economic projections, which by definition require assumptions about future human behaviour, can be right or wrong, it is true that her proposal has spurred a vigorous debate among economists. A lot of the points they make do not bode well for her plan.
There is widespread skepticism about whether the tax would raise the revenue its proponents suggest, for example. Meanwhile, one comprehensive budget model estimates that Warren’s proposal would shrink the US economy by between 0.9% and 3.5%.
One possible consequence of her plan that has received too little consideration is its effect on international investment flows. There are good reasons to believe that a wealth tax would put US investors at a disadvantage relative to their foreign counterparts.
First, the wealth tax would result in a sharper fall in national income than in GDP. If taxes on US corporations themselves stayed competitive and the regulatory environment
remained favourable, the US would remain an attractive place for global investors.
The implication, however, is that a greater share of US wealth would be owned by foreigners. Wealth inequality within the US might fall, but not because of a redistribution of wealth within the US. Instead, US businesses and workers would be increasing the fortunes of foreign investors.
Second, greater foreign ownership of US assets would lead to a higher trade deficit. Before they can invest in the US, foreigners have to purchase dollars. That would drive up value of the dollar and make US exports less competitive and foreign imports more competitive. This effect would hit US manufacturing and agriculture particularly hard, undermining Warren’s goals of reviving those sectors.
Third, the wealth tax would put private businesses at a disadvantage. Unlike their publicly traded rivals, they depend more heavily on domestic investment. The biggest international corporations, meanwhile — which Warren argues already have too much monopoly power — are almost all publicly traded. Her wealth tax would give them even more power.
Lastly, the wealth tax has the potential to change the nature of US entrepreneurship — and not for the better.
Immigrants come to the US to start businesses not just to make money, but to realise their vision. If the US tax code makes that harder, over time the rest of the world outside of America would start to attract a greater share of entrepreneurs.
It wouldn’t happen overnight, but eventually US-born entrepreneurs might start moving to Singapore or Dublin to form startups. The wealth tax could wind up decreasing the US’s exports of goods and increasing its export of talent.
—Bloomberg