What the Sanders or Warren Wealth Tax Means for Inequality in the U.S.

That's you, with your thirty million odd own around forty of the nation's wealth. At least two prominent contenders for the U S presidency, and quite a lot of economists think that needs to change. I'm going to talk later to two of our europe based economists about the experience of wealth taxes here, and I'll also be talking to Bloombergs Jiano Randall in Frankfort about the thirtieth anniversary of the fall of the Berlin War. But first his o U S economy reporter Cat Dmitrieva with the low down

on wealth taxes and the US presidential race. Today, we say to Wall Street and the billionaire class, you ain't gonna get it all anymore. That's Bernie Sanders. Yes, that is a two cent tax on fortune's over fifty million dollars. Your first fifty million, don't worry, you're in the clear. But for your fifty million and first dollar, you gotta pitch in two cents and two cents for every dollar

after that. Just and that's Elizabeth Warren. Their voices are becoming more and more familiar as campaigns heat up for presidential election. Both have big plans to reshape US tax policy. Their goal narrow the gap between the haves and have nots. America is now the least equal developed nation, largely because of outsize gains among the rich. For the majority of Americans,

their wealth has actually declined in the past decade. That's despite a record stock market, the longest economic expansion in history, and the lowest unemployment in fifty years. Inequality also played a role in the election. Donald Trump won in part by promising jobs and an improved life for those left behind. Where you're born, where you went to school, if you went to school, how rich your parents are. These all

dictate where you'll end up in America. So how do you solve an issue that's so complicated and runs so deep Sanders and Warren think they have the answer. Make the rich pay more. For Warren and Sanders, a wealth tax is a way to even things out, to redistribute economic gains. More broadly, we have something that's just fundamentally wrong with an economy that isn't performing well for broad

majorities of the population. Stephanie Kelton is an economics professor at Stony Brook University and she advises the Sanders campaign. You know, this is an economy that on the surface might look pretty healthy in terms of the headline unemployment numbers or GDP growth, but underneath the surface there is a lot that isn't working, which growth has stagnated this year despite a tight labor market. Those without a college degree make less than half with someone with a master's

degree makes. If they go to school, they're likely to get saddled with huge amounts of debt. Meanwhile, health care is becoming more and more expensive. For people making the media income and working multiple jobs, life can feel impossible. The outcome can be tragic. More people, especially white, middle aged men, are committing suicide or dying of drug overdoses.

So why is taxing the solution? Gabrielle Zokman, the economists who advise Standers and Warren, explains, you know, look, taxation is one of the key determinant of the long run concentration of wealth. That's one of the big lessons from history. You know when when when the tax system was much

more progressive, that also when inequally was lower. And uh, if you care about reducing the concentration of wealth, then the most direct and powerful tool would be a progressive wealth dext Zuckman says wealth translates into political power and an erosion of democracy. He is one of several economists, including Thomas Peaked and Emmanuel Says, who have elevated the

issue in their field. Kelton, who thinks that generally a government doesn't need to raise taxes to spend acknowledges the reality on Capitol Hill and the question how are you going to pay for it? I mean, this is the sort of way it works in Washington, d C. Right, You're you're a candidate or you're a lawmaker, and you want to do some big, ambitious stuff and you've got an agenda, and it's going to cost a lot of money, and well, if you have to go where the money is, okay,

where's the money. Well, I guess the rich people have all the money. You know, everybody knows that there are these concentrations of income and wealth in the hands of a small number of very, very well off people. Here's a breakdown of the plants. Sands is more ambitious, with his plan, cutting the average billionaire's well than half in the next fifteen years. The annual tax would apply to about one hundred and eighty thousand households. Warren's would apply

to seventy thousand because her wealth threshold is higher. In a nutshell, both candidates would raise several trillion dollars from multimillionaires to be spent on social programs. But some research has shown that redistributing income may not be all that effective. William Gale is co director at the Tax Policy Center in Washington. His research shows that a small boost in taxes for the rich has a pretty negligible effect on

overall inequality. After all, even if a billionaire hands over tens of millions of dollars, there's still a huge gap between them and someone working several part time gigs at a minimum wage. One question, of course, is how much should you is taxes? A second question is is that really the best or only way to narrow the inequality gap. We need to consider both government spending uh and tax policy.

There's no guarantee of success. In fact, fifteen countries in Europe have tried to implement some kind of wealth tax in recent years, but only four still have one. Why the levies didn't raise a lot of money and they were pretty tough to collect. More on that in the next segment, what's the ideal solution? Then, Gail suggests closing income tax loopholes, improving education, and bolstering the social safety net. It's also messaging. It's not about punishing the rich. In fact,

some rich people are actively supporting higher taxes. I'm more s Pearl. I'm the chairman of a group called the Patriotic Millionaires. We have a group of hundreds of wealthy business people and investors who are very concerned that the growing inequality is going to destabilize our country. We're at a turning point and we might end up with, you know, pitchforks or taxes, and I'll choose taxes. Pearl was formerly an executive at black Rock, one of the world's largest

fund managers. There's a growing understanding that inequality isn't just an issue of morality but also basic economics. If the majority of people aren't increasing their wealth, they're spending is restrained, business formation is lower, and the economy that relies so

much on consumption won't grow as fast. I made a lot of money because people pay their mortgage bills on time, and their cell phone bills and their iTunes bills, and money's trickled up from all of these people paying these little bills every month to those of us who have invested in the companies like Amazon and Google and Verizon, and the banks who make money from those monthly bills coming in. And without people who can make their payments

every month, investors can't make money either. Wall Streets flagged some concern about a war in presidency as she rises in the polls. Others like billionaire investor Ray Dalio, and even ratings agency S and P have said inequality is one of the biggest issues putting the economy and political stability at risk. There's been some movement. A handful of places in the US have started rolling out taxes that

hit companies, worsening the income divide. Portland, Oregon added a surcharge to companies where the top executive earns one hundred times more than the typical employee. Still, there's a long way to go for national policies to come and force, and the election is a full year away. The good news, politicians and voters have a lot of options, and look, the wealth taxes one policy that can help address the rights of inequality. But the other policies that are equally

are almost as equally important. You know, fixing the income tax, corporate taxation, but also you know, anti trust, regulation of intellectual property, UH, access to education, reforming the healthcare system, and all of these matters. And UH, countries choose the level of inequality that they have through government polysis, and the choices really ours to make. For Bloomberg News in Washington,

d C. I'm Catty Dmitrieva. So in the debate about wealth taxes, one claim you hear a lot in the US is that wealth taxes would make America or European. Howether that's a good thing or a bad thing, I guess it depends on your point of view, but wealth taxes certainly sound like something Europe would have a lot off with all of its emphasis on social solidarity and redistribution.

So you might be surprised to hear that Switzerland's currently the only European country that raises a significant amount of money from wealth taxes. It's true that more than a dozen European countries have had wealth taxes at some point in the last few years, but nearly all of them have abolished them, and two countries that have largely junk

their wealth taxes are Sweden and France. We have a Swedish economist in residents now at Bloomberg Economics, Johannah Jansen, based in Stockholm, and a French economist, Maiva Kuza, who is currently in Switzerland. So I thought it might be useful to talk to them about the experience there of wealth taxes. Yohannah, let me start with you tell me what happened to wealth taxes in Sweden. Well, you're right, we have abolished them. We abolished them in two thousand

and seven after sixty years. Actually, and you're right, it was not because Swedes have a problem with taxing the rich. Actually it was that the tax after several years, included so many tweaks and exceptions that it was deemed to be unfair. In the end, and that is something that you hear a lot that it's not so much the principle of wealth taxes, it's the fact that you're then you and people try so hard to avoid them that they end up a very very extorting and messy exactly,

that's it. And we had a number of well known corporate leaders that threatened to move abroad, and some did. Henderson Marrit's h and MS founder Arlen Passion did move also, i ke as in Rakampra did so too. Uh And in a bid to keep nohow in capital in the country, certain shares in publicly owned companies were actually made exempt and that, in combination with a fairly low threshold for this wealth tax, that meant that the tax was paid not by the wealthiest but by many middle and above

average in com earners. But it does it does seem odd though, when you have a country that you know where high income folks are paying very high marginal tax rates. Do you think there was something just more visceral about people feeling that wealth should be shouldn't be taxed in the same way as income. Well, perhaps I think it's also that what we're seeing in Sweden now is that and It's like that with tax policy. If if it's like pruning a garden, if you tax something heavily, it

will wither. If you reduce taxation, it will likely grow. And what we're seeing in Sweden now is that because capital taxes have been lowered while labor income taxes are still high, people tend to start their own companies. Even consultants start their own companies and instead of having a labor income, they make it a capital income. May even

let's talk a little bit about the French experience. I mean, I don't quite remember it, but I know when I was first studying economics, President metals introduction of the wealth tax when he came in one was talked about as being the great kind of move against the tide of

global opinion. Remember an eighty one. It was a period where market reforms were coming into the fourth Ronald Reagan and Margaret Thatcher, and his wealth tax was kind of symbolic of the fact that France was taking a different direction. But we have now Prepresident Macro has basically got rid of it in the last couple of years. Is that right, Yes, that's correct. So it was introduced your right by in one and it was partly abolished by Macro follow in

the twenty seventeen addiction. So out of the wealth tax, they have kept the tax on housing wealth, which is about it the fourth of the total tax base that was in place before, and they have abolished the tax on financial wealth more generally. And the stated objective was actually to um increase productive investment into the French economy by avoiding that. Actually some capital moves apart or in UM look tax loopholes to avoid to avoid the wealth tax.

Do you think it's going to have any of those effects? I mean, do you think it was ever a sort of negative in its effects as people said, and is now going to cause this great rebirth of growth or has it become more symbolic. So clearly there was a symbolic effect, and I think the signaling that President Macron was really poor business was quite strong from abolishing this tax.

We're quite lucky that there has been a committee set up to assess the impact of the change to the wealth tax and the change to the taxation of capital um and they have given their first reports earlier this month, in October to last month, and so far it's realy to tell how much impact that will have It's quite difficult to know actually how much tax exile had happened

before the tax was partly abolished, so it's difficult. But the French treas or the French Minister of Finance is starting to publish a lot of data and an animalized data and back season wealth taxes and wealth in general, so pretty that will be a good laboratory to understand.

How so as well if taxes can affect behaviors and inequalities, well, I guess there is a bit ironic that you've got Macron kind of getting rid of largely getting rid of the wealth tax, just as American politicians and it seems like an awful lot of economists are all saying that maybe these kind of taxes are a good idea. And it is partly actually because of the data that that the French economist Thomas Piquity has been putting out there.

So is this do you think that we will be sort of internationally moving more in favor of taxing wealth in one way or another, even if maybe the French way of doing it was not the right way of doing it. So generally wealth taxation is progressive because there is accomredation between with an income. So that means that if you start taxing higher were for the weddest households, so it's equivalent to increasing the effective tax rate and

but with higher income. So I think that's the first that's a fast fashional way we might see more well spectation, especially if you feel that income including capital income is actually more difficult to tax. Because we're within equality has taken such a prominent focus in the debate, it's probably something we will see debated more in the next and we are seeing our heady debate in more in the

economics and of physical or government policy debate. We're going to have a lot more debate around asset taxation, I think everywhere, but certainly as economists we probably is. It's annoying for people to hear, but economists tend to focus on the details of these things and it's going to

matter quite a lot. I think about the details of those proposals on the US presidential campaign, and maybe we'll come back to it in a few months time, but in the meantime, Johanna Jeanson and Stockholm and may have a kuza in Zurich. Thank you very much. Thank you for having me. Thank you. Before we go this week, we thought we should go to Germany to reflect on

one anniversary and one new beginning. The anniversary, of course, is the thirtieth anniversary of the fall of the Berlin Wall, and the new beginning is the arrival of Christine Lagarde on Monday this week for her first day in the office as President of the European Central Bank. Well Yana Randall is an economy and central bank editor of Bloomberg based in Frankfurt. Yanna, let's talk about the ECB first.

That's your your bread and butter day to day. What have we seen of Christine Lagarde since her arrival at the u c B on Monday. We saw her walking into the c B, which which was actually quite nice. He took a few minutes to chat to reporters on on her first working day, and then she disappeared very quickly saying, um, she has a lot of catching up, a lot of people to get to know, to do.

And the first speech she gave actually that very same day, Monday evening in Berlin to uh to applaud the efforts and and Lord wolf and Schoy Blue, former Finance Minister of Germany, She hasn't spoken about monetary policy yet, so that is something that we're very much looking forward to. But she has paid tribute in that sense to to a great leader that she knows very well from her time as French finance minister and um as head of the IMATH. Yeah, and wolf Going was a pretty towering

figure during the whole of the Eurozone crisis. But you you literally wrote the book on Mario Drug with your Bloomberg colleague Alessandro Spetziel, behind the scenes look on how he saved the euro I think it's available in Italian now, but I think hopefully in English suit in all good bookstores. What do you expect to be the big contrast between the two, Christine Lagarde and Mario Drug. I think we will see a lot more from Christine Lagarde in the in the public eye. UM. I expect her to be

much more outgoing, much more engaging with the public. To see her show up at events, give interviews, give speeches. That's something that Mario Druggi hasn't really done over the past couple of years. UM. He has basically only communicated during press conferences, the ones following the ECB decisions. Testimony in Parliament that sort of thing, but he hasn't really been out there explaining ECB policy to the public. And I think, um, look, guard, that's one of her pot

forte's um to engage with the people. She's a very charming person. She likes to be with people, talk to people. So I think that'll that will do the institution very well, especially in the light um of criticism lately, especially in Germany where the CP isn't particularly well regarded or its monetary policy. You should say you're right about the charm.

I mean, I think Mary Drug is quite charming. But I've interviewed Christine Laguard many times over the years, and she as a way she she can be quite kind of conspiratorial. You know, before the cameras are running, she compliments you have a little conversation around your boots that you're wearing or whatever it is. You know, She's just she's very good at putting people at ease and then

communicating well, you're right. And it's the risk that she actually knows some of these people too well, particularly politicians. You know, if the ECB needs to stand as a bulwark against political pressures in Europe, just as any Central Bank hast too. Do you think that might be an issue that she has such strong relationships already with the politicians. I think actually quite to the contrary. She is somebody

who really grows attached to the institution she leads. You saw that at the IMAF she adapted very quickly to the to the spirit of the institution and became a very outspoken defender of the institution, and I think we'll see something similar. And if anything, the close relations to governments, to finance ministers, to heads of states well help her do her job, because if you look at it, um, the e c B is really coming to an end

of the line. They are running out of tools. It's of course something that a policymaker would never admit, but interest rates are already at a record low. Quee has limits and um, although they say, you know, they have some way to go. Ultimately she needs governments to to step up their game. They have been calling on governments to step up fiscal stimulus, UM, structural reforms, that sort of thing, and I think her relationships with the political

elite in that sense can only help. Well, we shall see, you will see how things go, and we'll be back to talk to you, I'm sure in the in the next few months. But a last word on the big historic anniversary that Germany has been commemorating the thirty years since the fall of the Berlin Wall. It's hard to imagine a euro without a unified Germany. Thirty years ago we didn't have the Eurozone. Um. If you go to Berlin now, the on the surface, the unification process seems complete.

You know, you wouldn't. You can't identify East and West just standing on that border in in in Berlin. But I know underneath, if you look at the economic data, and certainly if you look at the political polling for far right parties, it's still quite a divided nation. Is that what you find, Yana? Yeah, I would agree with that, And I think a lot of it has to do

with how that unification or reunification came into being. A lot as rooted in the in the political decision, the economic decisions that were taken right in the nine nineties, in the early nineteen nineties. Um, And what you can what you can still feel today is that many Eastern German people are still scarred from from the process. About three million people lost their jobs in the early nineteen nineties.

Now the labor force was only nine million people big, so that's a third of the labor force right there. And unemployment was was a total foreign concept for for somebody from from a communist country, so so that hit deeply. And um, things have obviously recovered since then, but unemployment is still higher in the East than it is in the West. People are actually working longer hours, they're making less money, they're less likely to get into leadership positions.

So there is a sense of feeling left behind still among a lot of people in East Germany. And that is also one explanation why you see people voting for populist parties, populist on the right and on the left.

And I think, you know, if anyone listening to this wonders where the economics really matters, that was the time when economics really mattered, because there was that the decision I think you were you're talking about it yet, the decision to have the conversion rate between the old the most mark and the mark deutschebak be one for one, that was the politically important thing, and all the economists at the time said, if you do that, you've got

very unproductive Europe. East German workers who will overnight be put out of work, and that's exactly exactly what happened. Taken a long time to come back from. That shows that economic decisions really can make a difference. Yeah, very much so. I spoke actually many years back to the vice president of the East German Central Bank about exactly this.

He said, Yeah, we knew that this was wrong from an economic point of view, but really politically there was no other way around, because how do you explain to people who have saved, who have worked, who have done nothing wrong, that their savings are basically worth only half

of what they thought they were. Um. So that was one very very big decision that was taken as a matter of fact, you know, when when you looked at which companies were actually um productive or competitive in that sense, after after that whole transition, there was one company in all of East Germany which was and um it's the one that makes fancy China fancy porcelains. I should ask you personally, you were born in the East of Germany.

What what's your memory I know you're terribly young, but what's your memory of the of the fall of the Berlin Wall? I have I have quite vivid memories of that. I grew up in Leipzish, which was one of the places where the Monday demonstrations were probably strongest leading up to the fall of the Berlin Wall. Um, so they led right by our house where we lived each Monday, and and it was a mixture of terrifying views and

also very um hopeful views. The day it finally happened, Um, it was a very strange atmosphere, a strange atmosphere throughout the city. I remember going to West Berlin with my family, taking the train up there the Sunday, after walking across that border and and being greeted by presumings of other people.

There were so many people and and and so many people from the east, so many people from the West just coming out to see to to give the kids chocolate and the parents coffee and and um, strange things that that you wouldn't necessarily give us gifts, but that were usually part of the packages that traveled from east

to west. One of my most vivid memories is actually going into um a fruit and vegetable store, on on Sunday in West Berlin, you know, on the weekend after the wall broke, and just seeing what was on display there. I think we must have stood there for minutes, just John's dropping. I'd never seen a pineapple in my life. I didn't know, you know, half the fruits that were on display. That's kind of the luxury that that you as a kid did not remember, or walking by a

toy store. It just, you know, it felt like heaven. Um, it felt like coming to a foreign place. Essentially, well we should. It is good to remember. Amazing things can happen. Yan at round Out. Thank you very much, pleasure, Thanks for listening to Stephanomics. We'll be back next week with more on the ground insights from around the global economy. In the meantime, you can find us on the Bloomberg

Terminal website, app, or wherever you get your podcasts. We'd love it if you took the time to rate and review our show so it can reach more listeners. And for more news and analysis during the week from Bloomberg Economics, follow as Economics on Twitter. You can also find me on at my Stephanomics. The story in this episode was

written and reported by Kata Dmitrieva. It was produced by Magnus Hendrickson and edited by Scott Laman, who is also the executive producer of Stephanomics Special Thanks to to Mevakuza, Johannah Jeanson, Yana Randau and Ben Holland. Francesco Leviy is the head of Bloomberg podcast thre