From "Trumponomics": Can the US Actually Tax Billionaires?

0:00Hi listeners, the Economics Show with Samaya Keynes is taking a couple of weeks off its usual programming. So today's episode is from the Bloomberg podcast, Trumponomics. The show explores how US President Donald Trump is shaking up the global economy and what will happen next. Each week, economist and journalist Stephanie Flanders explores these questions with a team of academics and fellow reporters. Today's episode examines whether taxing America's richest is politically or constitutionally possible. Search for Trumponomics wherever you listen. I'll be back here soon. But for now, enjoy the show.

0:41Bloomberg Audio Studios. Podcasts. Radio. News.

0:55Stephanie Flanders: I'm Stephanie Flanders, Head of Government and Economics at Bloomberg, and this is Trumponomics, the podcast that looks at everything in the economic world of Donald Trump. This week, we thought it made sense to talk about how the US tax system is struggling to tax gazillionaires, and whether any of the bright ideas being floated for extracting more from the mega-rich would actually work. It's not only the so-called class warriors who are worrying about wealth taxes these days. The International Monetary Fund held a wargaming exercise a few months back with around 50 finance and technology experts.

1:28Stephanie Flanders: David Ramley wrote about it for Business Week. It included folks from Google DeepMind and the RAND Corporation and the Federal Reserve, and they spent hours debating how AI could upend the global economy in various ways. The AI doomsday scenario they were most concerned about, it turned out, was not killer robots, but a potentially civilisation-ending attack on the income tax base. The US government, like many, relies on income taxes for much of its revenues. So if AI destroys well-paying jobs, the theory goes, it could destroy a lot of those taxes. Now, there's plenty of companies and big investors who would be raking it in in that scenario.

2:09Stephanie Flanders: The trouble for the tax base is that most of that money would be in the form of capital gains on stocks and other assets, which tend to be very lightly taxed. In fact, in the US, they're often not taxed at all. And a number of Bloomberg stories this week have highlighted new and even more efficient ways that the super rich are finding to avoid capital gains, even as gasoline prices jump again and the high cost of living stays as the number one issue for most voters. So no wonder that we're hearing more and more proposals from progressive politicians for wealth taxes, both in Europe and the US.

2:43Stephanie Flanders: In California, a one-time billionaire 5 % tax is on the ballot in the midterm elections in November. Remember, that's got a lot of attention. There are others. Could any of them get passed? And even before we get to that, would any of them work? Joining me to discuss this, we have in our DC studio, Caitlin Riley, who covers Congress for us with a focus on tax and fiscal policy. And I should say, although she's sitting in a special sound booth in Capitol Hill, it is actually pretty noisy. Caitlin, thanks very much for joining us anyway. It is. Thank you for having me. And I'm happy to say coming back this week is Jason Furman, Professor of Economic Policy at the Harvard Kennedy School and Harvard's Department of Economics.

3:24Stephanie Flanders: And he, of course, was chair of President Obama's Council of Economic Advisers, writes and thinks about pretty much everything this podcast is interested in. Jason, thanks for coming back. Great to be back with you.

3:40Stephanie Flanders: Caitlin, just give us a quick summary of how live this issue is, of taxing the wealthy where you hang out on Capitol Hill? Well, it's increasingly front of mind for Democrats. Democrats are not currently in power in either the House, the Senate, or of course, the White House. And so right now, these ideas are more theoretical, but they featured heavily in the 2020 presidential primary on the Democrat side, and we would expect them to feature heavily again, as we look forward to 2028, there are several competing sort of tax proposals on how to get at taxing the wealthy. Some of those are wealth taxes.

4:20Some of those would use other types of tax to get at that wealth that's not collected as wages. But we would expect that Democrats will continue to have this debate kind of between the progressive and more moderate flakes of the party about how to tax the wealthy. A large part of that is because when you want to create ambitious new social programs, you have to figure out ways to pay for them. And we're already reaching dizzying levels of debt. So how to pay for a democratic agenda will be front of mind in the years ahead.

4:52Stephanie Flanders: I mentioned about the possible future erosion of the tax base due to AI and a reduction in the number of a certain kind of jobs. But the tax base has already been somewhat eroded, There is also just a concern that the system is getting worse and worse at taxing some of the new money coming on stream. Exactly. The tax system in the U.S. focuses heavily on wages, and that's really not the way that the wealthy collect and expand their wealth. And the tax code has not been very good at getting at those types of holdings. And we've actually seen the taxes that do target wealth erode over time. The estate tax is a big piece of that.

5:35The corporate tax rate here is also lowered over time. And so we've seen the way that previous generations were able to impose heavier taxes on the wealthy erode here. There's some interesting research by French economists Emmanuel Saez and Gabrielle Zucman, who looked at the amount the very wealthy paid in tax going back to the 1950s. And recently, for the first time, you saw the top 400 wealthiest households, according to their research, pay actually a lower effective tax rate than the bottom 50 percent of households in the U.S.

6:14Stephanie Flanders: Jason, first I should ask whether you sort of buy into the idea that we've got less and less good at taxing wealth, or is it just that there's just a lot more of it about and there's more focus on it? So let's just state a few facts and then I'll get to your question. The first is that the tax code, if you look at slices up through the top one-tenth of 1%, is actually progressive. The top one-tenth of 1 % is paying higher taxes on average than people in the middle who are paying higher taxes than people on the bottom. Now, I can't tell you as an economist, is it progressive enough? As a person, I think it's not progressive enough, and I'd like to make it more progressive.

6:52The second question is, how has it changed over time? It's become a bit less progressive. And the biggest action there has been lowering the corporate tax rate, which used to be 35 percent and is now 21 percent. And so that has reduced the taxation of capital income, which disproportionately goes to people at the top. But there's also been, relative to 20 years ago or 25 years ago, things like capital gains and dividend rates are lower than they used to be. Then third, there is an issue of the progressivity within the top one-tenth of 1%, the top 400 people that Caitlin mentioned. And in one sense, there's a lot of money that those people have.

7:35relative to the fiscal system as a whole. It's just not quite as important as thinking about the top one-tenth of 1 % or maybe even the top 10 % of Americans. And then the very last thing is what is your goal? Is your goal to raise revenue while causing the least pain? Or is it to discourage some type of activity you think is bad? When we do payroll taxes, we're mostly trying to raise revenue and we don't want to harm anyone. When we do tobacco taxes, we want less smoking. The goal is to actually change behavior. When you're taxing corporations, when you're taxing the wealthy, what are you trying to do?

8:12Raise revenue with minimal pain or change behavior? And that's a real threshold question that's debated.

8:18Stephanie Flanders: Caitlin's already pointed out that without any kind of Democrat control in Congress, let alone the White House, they're unlikely to be passed. But, you know, you have Bernie Sanders and Representative Ro Khanna. They propose a 5 % annual wealth tax on billionaires. The California Initiative, which is on the ballot, there's a bunch of them, but the main one is a 5 % tax, one-off tax, supposedly, on net worth over$1 billion. I mean, measured by your tests, do either of those make sense? Do either of those sound like they're just raising money or are they trying to get rid of billionaires? I am quite skeptical of both of those proposals.

8:58So first of all, one, it depends on this fork. In my view, Jeff Bezos has made the world a better place by bringing down prices, expanding variety, even giving access to small businesses to ways to sell things they didn't used to. I also think Jeff Bezos wouldn't miss the money if you raised his taxes. So I very much support raising taxes on Jeff Bezos, but I'd like to do it in a way that doesn't change Amazon that much. I think Ro Khanna and Bernie Sanders don't mind if you got less of the type of economic activity that Jeff Bezos engaged in. They think it probably didn't, on balance, make the world a better place.

9:34So we're coming from it from somewhat different places, which gives you different answers. The second thing is for the two taxes that you just gave as examples, the answers are somewhat different. At the level of California, and I would also say, by the way, the same thing at the level of France, it's just a lot easier for people to move. And so you may not succeed in either goal. You may not raise revenue if you drive people out of the state and lose their jobs and their income taxes and the like. And you may not even have fewer billionaires, like fewer billionaires in California, but you'll have more in Texas.

10:05And if you care about the United States as a whole, I don't think you'd count that as any sort of victory. So the smaller the unit that's trying to do it, the harder it is to do this. Then nationally, there's another issue you run into, which is the U.S. Constitution says you can't have direct taxes unless they're apportioned exactly to the population in the state. There's then an amendment that says that as an exception for income taxes, there's no exception. for wealth taxes, most constitutional scholars would agree that the current Supreme Court would rule wealth taxes unconstitutional. So at the national level, I think it's just a waste of time to be talking about it, even if you think it's a good idea, because courts wouldn't allow it.

10:52Stephanie Flanders: Caitlin, is that right, that people recognize that there's this pretty solid constitutional case against these things, regardless of whether that makes sense that you can't have direct wealth Well, I think supporters of the wealth taxes would probably argue that it's an open question. But yes, it's true. There is this like very large looming constitutional question. And with the current makeup of the Supreme Court, it's difficult to see them siding on the on the side of a wealth tax. So there is this potential very hard stop at the end of this debate.

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12:02Stephanie Flanders: Caitlin, I remember finding surprising when I first went to work in the US a million years ago was the step up in basis rule that resets the cost basis for assets. So if you get extremely wealthy in your lifetime, maybe you are Jeff Bezos, you don't realize those capital gains, they're just sitting there as part of your assets and your wealth. you pass it on to your children and it's considered you sort of starting the clock again. And all of those gains during your lifetime are not ever taxed on capital gains. I think that's definitely part of the conversation. And then another piece of this is not only do those assets value reset at the point of death, but for the lifetime of the person who holds that wealth, they're often able to borrow against it and able to kind of like access liquidity without actually selling those assets.

12:54And so for that reason, those loans are becoming one of the focuses of a potential place where you could tax. Adjusting stepped-up basis is another piece of it. Taxing unrealized gains is a proposal Senator Wyden has put forward. He's the top Democrat on the Finance Committee in the Senate, which has jurisdiction over tax policy. So, yeah, there are a number of other ideas floating around that would allow you to effectively target taxes at the very wealthy.

13:27Stephanie Flanders: Jason, I think it's one of those things that just strikes people as an extraordinary benefit. If you're rich enough that you just never need to realize these gains, you then get to just pass them on intact to your heirs who, given the way our estate tax works, potentially don't pay any further tax on them. Is that the easiest thing that you could tackle within the Constitution? Yeah, absolutely. That's the way I think we should approach it. And broadly, two things. One is, without even getting fancy, you could have higher tax rates. You could raise the top tax rate, which is 37%, by several percentage points without creating very much of a problem at all.

14:06You could raise the tax rate on capital gains to 28%. You could raise the corporate rate. And those are just one line changes in the tax code, no constitutional debate whatsoever. And it would work just fine. Second is the types of structural issues that Caitlin was bringing up. And they largely get at the capital gains rate applies in theory. But in fact, if you hold things, you don't pay it. And there's different ways of getting at it. One is if you eventually have to pay it, then holding it is an advantage. But the advantage is timing. It's not the advantage of you're never, ever going to pay it.

14:41That actually has one nice side effect, which is right now, sometimes people get locked into assets with capital gains. For a capitalist system, you'd like whoever is the most productive owner of an asset to own it. If it costs money for the productive owner of the asset to sell it and someone else to buy it, they may not do it. They may get locked in. Capital may be in the wrong hands. So one thing I like about things that reduce this and taxing gains as they're accrued, the Wyden proposal that Caitlin cited, or taxing them at death, or reducing the ability to borrow against them, all of these are different ways of not just fixing the existing system, but actually getting rid of an economic distortion.

15:23Stephanie Flanders: I guess the reason why the debate is not on raising the basic or the highest rate of income tax is that that isn't capturing this kind of wealth that we're talking about. If you start taxing unrealized gains, I mean, aren't there just enormous logistical and technical issues with that? You're taxing people on things that they haven't actually received as income. Presumably, you're addressing the constitutional question by saying they've effectively received that income. Yeah, the Biden administration had what I thought was actually a pretty thoughtful proposal on this, because there's two issues you need to grapple with.

15:59One is if you tax someone on gains when the market runs up 20 percent and then it goes down 20 percent, do you send them a check? So what they did was basically averaged it over five years and had you pay out installments. And then if the market fell, it just canceled your future installment. So they handled the refund issue. The second is how do you value privately held assets? And they basically assumed they had a certain rate of return. And then if or when you eventually sold them, you reconciled with the assumption that was built into it against what had actually happened. I think that was probably a workable system.

16:36It's also the case that it was exceedingly unpopular in certain quarters. And we've seen it actually around the world in different countries. I believe Belgium and Italy, but don't fact check me because it's a little bit of a distant memory, have tried at various times to disconnect capital gains payments from when you actually get the cash. And those didn't last very long or maybe even were canceled before they went into effect. So if you just tax them at death, you get sort of 85 percent of the way to the benefits of taxing them each year as they accrue with maybe 20 percent of the political pain.

17:11So that probably is the more prudent way. But I'm tempted by the as it accrues.

17:18Stephanie Flanders: But Caitlin, I mean, Jason mentions the unpopularity. And actually, Ben Steven made this point on the podcast the other day. Until quite recently, billionaires were not particularly unpopular in the US. And then I think partly because they've been so much more in your face in recent years. And you have the likes of Elon Musk and the numbers just becoming dizzyingly high. That seems to have tilted a bit. But it is still incredibly unpopular to really tax wealth at death or tax inheritance at all. I mean, in fact, in the big, beautiful bill, the estate tax exemption was raised to$15 million per person.

17:54Stephanie Flanders: And that doesn't seem to have been a particularly unpopular bit of the bill. That's correct. I will say when you poll people and ask them generally about tax fairness and do you feel that you're taxed fairly, do feel that the very wealthy are being taxed fairly. Americans do tend to support increasing taxes on the wealthy. Many of them also feel like they're unfairly taxed. So there is a little bit of a taxes for you, but not for me mentality. But it does get more tricky when you dial into kind of the nitty gritty of specific tax policy. And I think the popularity would also probably depend heavily on where these taxes were targeted and what sort of income thresholds were placed onto them.

18:42Stephanie Flanders: But Jason, certainly, and this is true in the UK as well, I mean, inheritance tax is just remarkably unpopular, even among people who realistically have no chance of ever having their heirs need to pay it. Yeah. I mean, I've been working on this topic in public policy for 30 years now, and I don't have a good answer for you. I remember once President Clinton, I think he was at a fundraiser, maybe it was in Idaho or something like that. And the person traveling with him called in to find out about the estate tax and said he's hearing a lot of complaints about the estate tax here in Idaho. And what can I tell him?

19:20And we sent back the fact that last year, six people paid the estate tax in Idaho, to which the person responded, yes, but the children of all six of them are currently sitting at the table with him at this fundraiser.

19:32Stephanie Flanders: Well, that tells you something about the unhealthy political influence of those who are wealthy. Right. And to be clear, it's another story that is too good to check. So it is in my memory. I am sure it has grown in my memory over time, but it captures the spirit of it. So that's part of what's going on. But yeah, no, I mean, I remember there used to be farmers that would roll up on Capitol Hill with their tractors. And you'd go through and say the estate tax has all these different special rules for farmers that make it really, really low, paid out over a really long time. And they'd be like, oh, this person had to sell their family farm.

20:05And that was basically mathematically impossible because the way in which it paid out over time was such that the income would always be way more than sufficient. So I don't know. I have a hard time with what I see as the irrationality of it. Now, to be clear, if you want to make an argument, and I have friends that make this argument on the conservative side that somebody worked hard and they saved a lot and they deserve the money and it's unfair. That's not exactly my moral perspective, but I don't think that's a crazy perspective. But if your perspective is this is destroying small businesses, destroying family farms, that's just not factually true.

20:39Stephanie Flanders: I mean, when you talk about things that are moral principles versus just kind of practical principles, you mentioned it for California, but you seem to be suggesting, Jason, that in the U.S., This question of not being able to tax wealth because this is so it's mobile capital and people can go. You may be right on this. You implicitly seem to be suggesting, you know, if you're in a European country, it's very easy for people to leave a European country. But in the U.S., it's going to be harder for people to avoid the U.S. tax jurisdiction altogether. Do you think that's true? Yeah. Yes, I was trying to say that.

21:13And I agree with myself on that point. But just to be clear, it's not like zero in the United States and 100 in Europe. It's a continuum. And it's not like if you raise the tax rate to 90 % in the United States, you wouldn't get more people leaving the United States. You would, and I wouldn't do it. But within the range of the types of tax changes that are under consideration that we're talking about, the moving out of the United States to me seems like a relatively small consideration. the moving out of California and moving out of France is a medium-sized consideration.

21:48Stephanie Flanders: Just to kind of bring this to a close, we've highlighted there's obviously a leftward shift, at least in parts of the Democratic Party, and that's producing some of these proposals from the side of the party that potentially would say, you know, we shouldn't have any billionaires. But I highlighted at the start that there's also this whole other reason why we want to get better at taxing wealth is that the income tax base could be eroded quite significantly by AI. Jason, I mean, we've debated this in the past, how dramatic the change might be from AI. But do you think that that could make these questions more current and the kind of analysis that you've shared about the best ways of doing this will become a much more live issue for policymakers?

22:33I think there's a decent chance it will become a much more live issue, but it would be a shame if we thought it was the only issue. So first of all, in terms of AI, yes, we don't know productivity, we don't know the impact on jobs, etc. One of the more robust predictions, though, is that it will lower the labor share and raise the capital share over time. I'm not sure about that, but I'd bet on that a little bit more heavily than I'd bet on the job loss. And I wouldn't bet zero, you know, bet entirely against the job loss. So that is in the sense that I agree with you that this is going to become a more important issue.

23:10It is the case, though, the labor share right now is 70 percent. I'd be shocked if in a decade it was below 50 percent. Maybe 30 years from now, it'll be 30 percent. In all of those, how you tax income is still going to matter. And so, yes, we should figure out how to tax the capital side, which right now is 30 % of income, probably rising. And the holes in the way we tax it, as Caitlin and you and I have been talking about, have been growing. So absolutely do that. But I don't think we should forget the old-fashioned income side, which is still the majority and likely to be for some time. And there's more room there as well.

23:47Stephanie Flanders: OK, well, so we don't have to worry about maybe we should just go back to worrying about killer robots. Jason Furman and Caitlin Riley, thank you so much. Thank you. Thank you.

24:09Stephanie Flanders: Thanks for listening to Trumponomics from Bloomberg. It was hosted by me, Stephanie Flanders, and I was joined by Bloomberg reporter Caitlin Riley and the Harvard economist Jason Furman. Trumponomics was produced this week by Moses Andam and Sam Asadi with help from Gilda De Carli in New York and Amy Keene. The sound design is by Blake Maples and Kelly Gadd. To help others find us, please rate and review us highly wherever you listen.

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