Quantitative Analysis of a Wealth Tax in the United States: Exclusions, Evasion, and Expenditures

Macroeconomic analyses of wealth taxes typically treat all household wealth as taxable, despite noted administrative difficulties with including owner-occupied housing and noncorporate equity in the tax base. In this paper, we quantify the macroeconomic and budgetary impact of avoidance due to these exclusions from a stylized, broad-based, top-wealth tax in the United States. We use a two-sector, large-scale overlapping generations model where, in the presence of exclusions, avoidance behavior arises endogenously through households’ reallocation of wealth and firms’ reallocation of economic activity. We find that while the macroeconomic and budgetary effects of the housing exclusion are insignificant, the noncorporate equity exclusion introduces a production-level distortion that results in a significant reallocation of economic activity from the corporate to noncorporate sector. We show that the federal revenue loss due to legal avoidance in the latter case can be similar to the amount lost due to illegal evasion via under-reporting wealth, but nonetheless have a quantitatively distinct path of macroeconomic aggregates. Finally, because interest in a wealth tax is linked to its potential for financing federal outlays, we show how variation in macroeconomic and budgetary effects across alternative expenditures affects the amount of new outlays availed by the tax itself. We find that while dedicating new revenue to public infrastructure investment leads to the largest increase in aggregate output, dedicating new revenue to federal debt reduction leads to the largest increase in outlays.