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If politicians are serious about wanting to rescue Social Security, they should put a wealth tax on the table.
A wealth tax—where the government taxes assets instead of income—has a lot to commend it, including fairness and simplicity. And actually, a very low such tax could solve most of Social Security’s looming funding crisis without making anyone scream too loud.
Wealth taxes have a bad rap, possibly because Democratic Massachusetts senator Elizabeth Warren took the idea to extremes during her 2020 run for the White House, but they have a more respectable history than many people realize.
Among their devotees are the frugal, capitalist, ultraconservative Swiss. Many of the Swiss cantons, equivalent to states or cities, levy wealth taxes on residents and that includes Geneva and—gasp—Zurich, the home of Swiss bankers.
Zurich levies wealth taxes rising up to 0.3% of net worth, on net worth over about $3.5 million, while Geneva starts at 0.175% and goes up to 0.45% on net worth over about $2 million.
That’s a long way from Warren’s proposal, which rose as high as 6%—remember: per year—on wealth over $1 billion.
Read: Can Social Security keep pace with high inflation? Maybe not, but you can still fight back.
The Swiss wealth taxes are on top of income taxes rising as high as 46%. We always think the grass is greener on the other side, but it rarely is.
Social Security is heading towards a budget crisis because more people are living longer, and because for years incomes above the taxable maximum, which is $160,200 this year, have been growing much faster than the incomes below it.
Social Security’s funding crisis is usually talked about in ways that are hard to visualize, all related to capitalized sums: A $20 trillion “actuarial deficit over 75 years,” a deficit as a certain percentage of gross domestic product or “taxable payroll,” a year—currently 2035—when the “trust fund” will “run out of money.”
It may be more helpful to think of it the way we think of other programs, and of our own budgets: Annual surpluses and deficits. Social Security has been running a deficit since 2010. In 2023 the deficit is likely to be about $340 billion, according to the most recent estimate by the Congressional Budget Office. That compares to a budget of about $6.2 trillion, and total tax revenues of $4.8 trillion. Within a decade, says the CBO, Social Security will be running an annual deficit of about $1.4 trillion, compared to a budget of $9.8 trillion and revenues of $7.1 trillion.
We’re so unused to talking about the program’s finances this way that the CBO doesn’t even publish the numbers like this. The press office told me I had to combine the numbers on two different tables to get the annual deficit in dollars.
Put another way, Social Security today is borrowing about 9% of the money it pays out: Within a decade that will be 21%, and by 2050 that figure will be nearly 30%. (That’s assuming benefits keep getting paid as beneficiaries hope: Without a change in the law, benefits would actually start being cut by 2035.)
A very low wealth tax would go a long way to filling this gap. The reason is that U.S. household wealth has absolutely skyrocketed in recent decades, way ahead of income. The richest people—think of the centi-billionaires—do not live on income, they live on capital. They can borrow $1 billion against their fortunes at low rates of interest, and never have to pay a nickel of tax.
When Ronald Reagan left office in 1989, the Federal Reserve estimates, U.S. households’ total net worth was five times their total personal disposable incomes.
Today it’s nearly eight times.
Back then the richest 0.1%—the richest one person out of every thousand—owned 9% of all the wealth in the country. Today he or she owns 12.5%.
That’s four times as much as the total amount owned by the poorest half of the country. Repeat: Out of a typical 1,000 Americans, the richest guy owns four times as much as the poorest 500 put together.
Meanwhile the richest 1% have increased their share from 23% to 30%.
None of this needs to be bad news or “deplorable.” That depends on your politics and other things. But it does suggest a simple solution to the Social Security problem.
A flat 0.3% wealth tax paid by all Americans, rich and poor, would generate about $420 billion in revenue this year, based on Federal Reserve numbers. (The total net worth of U.S. households is $140 trillion.)
That alone is enough to fill Social Security’s budget gap this year and leave about $100 billion left over. If U.S. net worth grows over the next 10 years as it’s grown over the last 10, the wealth tax would be able to fill the majority of the budget hole on its own. (Using those numbers, a wealth tax of 0.5% of assets would fill all of the budget hole).
The advantage of a flat tax is that it’s flat (which conservatives like) but very progressive (which liberals like). It can be both things at the same time because the wealth is distributed like a hockey stick, rising slowly until just near the end, when it suddenly shoots up vertically.
So even with a flat wealth tax, about a third of the country would pay nothing, while Elon Musk, with a net worth last estimated around $190 billion, would pay $570,000.
So those in the top 0.1%, with an average net worth of $136 million, would have to pay about $400,000 in extra taxes. The bottom half, on average, would be paying $200. (Many, actually, would be paying nothing.)
A wealth tax is actually a way for the Social Security trust fund to participate in the growth of U.S. stocks, real estate and other assets without having to invest in them directly. Hey, there are a lot of worse ideas—many of them circulating in D.C. as policy proposals.
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