Elizabeth Warren's proposed wealth tax will raise $1 trillion less than expected and slow the economy, study finds

  • Sen. Elizabeth Warren's proposed wealth tax would set back US economic growth by 0.9% in 2050, according to a new study released Thursday, possibly undercutting the signature plan helping to power her progressive campaign for the White House.
  • The analysis from the Penn Wharton Budget Model — a nonpartisan research institution at the University of Pennsylvania — also estimated that Warren's signature plan would raise between $2.3 trillion to $2.7 trillion in revenue from fiscal years 2021 to 2030. That's significantly less than her campaign forecast.
  • Richard Prisinzano, the director of Policy Analysis at the Penn Wharton Budget Model, told Business Insider the study assumed that the wealthiest citizens would pay it and ultimately invest less in the economy, leading to a slowdown in its growth.
  • The study is likely to face criticism among some economists who argue the Penn Wharton Budget Model downplays the possible economic boost from Warren's sweeping agenda.
  • Visit Business Insider's homepage for more stories.

Sen. Elizabeth Warren's proposed wealth tax would set back US economic growth by 0.9% in 2050, according to a new study released Thursday, possibly undercutting the signature plan helping to power her progressive campaign for the White House.

The analysis from the Penn Wharton Budget Model, a nonpartisan research institution at the University of Pennsylvania, also estimated that Warren's signature plan would raise between $2.3 trillion to $2.7 trillion in revenue from fiscal years 2021 to 2030.

It's significantly less than the Warren campaign's $3.75 trillion revenue projection. 

Richard Prisinzano, the director of Policy Analysis at the Penn Wharton Budget Model, told Business Insider the study assumed that the wealthiest citizens would pay the tax and ultimately invest less in the economy, leading to a slowdown in its growth.

"Rather than reduce their consumption, they're gonna pay that tax out of savings. And because they're reducing savings, it shrinks the economy and GDP goes down," Prisinzano said.

The 0.9% cut in gross domestic product relied on the scoring conventions used by the Congressional Budget Office where additional government revenue generated from plans is directed towards reducing the deficit — a move that bolsters growth in the study's framework.

"Paying down debt is the best you can do in terms of how much the economy shrinks," Prisinzano said. "Unless you assume that the productivity boost you're gonna get from the program is really big."

Prisinzano also said the lower revenue forecast resulted from fewer tax dollars going to government coffers because of lower wages in a shrunken economy. Wages are estimated to drop between 0.8% to 2.3%.

The study's authors, though, conceded they couldn't fully analyze wealth tax avoidance by billionaires without specific legislative language and noted the Warren campaign has stressed that significant enforcement efforts would be in place. They relied instead on studying existing tax behavior of the richest citizens. 

Warren's wealth tax plan would kick in for Americans with net worths over $50 million, with households paying a 2% annual tax on their assets like stocks, yachts, real estate — everything they own. Then it would be ramped up to 6% for fortunes totaling over $1 billion.

Her campaign has said it would use the revenue to fund her plans for universal childcare, tuition-free college, and drastically reducing student debt. She doubled the top tax rate to 6% to help cover the cost of her "Medicare for all" proposal.

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Sen. Elizabeth Warren, D-Mass., attends a Senate Armed Services Committee hearing in Dirksen Building titled 'Foreign Cyber Threats to the United States,' featuring testimony by Director of National Intelligence James Clapper and others, January 5, 2016.

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Senate Armed Services Committee members (L-R) Sen. Martin Heinrich (D - NM), Sen. Elizabeth Warren (D-MA) and Sen. Gary Peters (D-MI) talk during a hearing in the Dirksen Senate Office Building on Capitol Hill January 5, 2017 in Washington, DC. The intelligence chiefs testified to the committee about cyber threats to the United States and fielded questions about effects of Russian government hacking on the 2016 presidential election.

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Senate Armed Services Committee Chairman John McCain (R-AZ) (L) and Sen. Elizabeth Warren (D-MA) arrive for a hearing with the Director of National Intelligence and National Security Agency chief in the Dirksen Senate Office Building on Capitol Hill January 5, 2017 in Washington, DC. The intelligence chiefs testified to the committee about cyber threats to the United States and fielded questions about effects of Russian government hacking on the 2016 presidential election.

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Democratic Nominee for President of the United States former Secretary of State Hillary Clinton, accompanied by Senator Elizabeth Warren (D-MA), speaks to and meets New England voters during a rally at Saint Anselm College in Manchester, New Hampshire on Monday October 24, 2016.

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Mark Wahlberg, Former Boston Police Commissioner Ed Davis, Boston Police Commissioner Billy Evans, Former Boston Red Sox player David Ortiz, Dun 'Danny' Meng, Jessica Downes, Patrick Downes, Senator Elizabeth Warren, director Peter Berg and Harvard Law professor Bruce Mann pose on the red carpet at the 'Patriots Day' screening at the Boch Center Wang Theatre on December 14, 2016 in Boston, Massachusetts.

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Democratic Nominee for President of the United States former Secretary of State Hillary Clinton, accompanied by Senator Elizabeth Warren (D-MA), speaks to and meets New England voters during a rally at Saint Anselm College in Manchester, New Hampshire on Monday October 24, 2016.

(Photo by Melina Mara/The Washington Post via Getty Images)

Former Red Sox player David Ortiz talks with Senator Elizabeth Warren at the 'Patriots Day' screening at the Boch Center Wang Theatre on December 14, 2016 in Boston, Massachusetts.

(Photo by Natasha Moustache/WireImage)

Democratic presidential nominee Hillary Clinton and Senator Elizabeth Warren hold a rally at St. Anselm College in Manchester, NH on Oct. 24, 2016.

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U.S. Senator Elizabeth Warren speaks at a Manchester 'New Hampshire Together' Canvass Launch event in Manchester, NH on Sept. 24, 2016.

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Senior United States Senator from Massachusetts, Elizabeth Warren speaks onstage at EMILY's List Breaking Through 2016 at the Democratic National Convention at Kimmel Center for the Performing Arts on July 27, 2016 in Philadelphia, Pennsylvania.

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US Senator Elizabeth Warren, Democrat of Massachusetts, holds up copies of Wells Fargo earnings call transcripts as she questions John Stumpf, chairman and CEO of Wells Fargo, as he testifies about the unauthorized opening of accounts by Wells Fargo during a Senate Banking, Housing and Urban Affairs Committee hearing on Capitol Hill in Washington, DC, September 20, 2016.

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Sen. Elizabeth Warren (D-MA) along with members of the Democratic Women of the Senate acknowledge the crowd on the fourth day of the Democratic National Convention at the Wells Fargo Center, July 28, 2016 in Philadelphia, Pennsylvania. Democratic presidential candidate Hillary Clinton received the number of votes needed to secure the party's nomination. An estimated 50,000 people are expected in Philadelphia, including hundreds of protesters and members of the media. The four-day Democratic National Convention kicked off July 25.

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Sen. Elizabeth Warren (D-MA) delivers remarks on the first day of the Democratic National Convention at the Wells Fargo Center, July 25, 2016 in Philadelphia, Pennsylvania. An estimated 50,000 people are expected in Philadelphia, including hundreds of protesters and members of the media. The four-day Democratic National Convention kicked off July 25.

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Representative Joseph P. Kennedy III welcomes Massachusetts Senator Elizabeth Warren on stage on Day 1 of the Democratic National Convention at the Wells Fargo Center in Philadelphia, Pennsylvania, July 25, 2016.

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Former Secretary of State Hillary Clinton accompanied by Senator Elizabeth Warren (D-MA) speaks to and meets Ohio voters during a rally at the Cincinnati Museum Center at Union Terminal in Cincinnati, Ohio on Monday, June 27, 2016.

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The Late Show with Stephen Colbert airing live, Thursday July 21, 2016 in New York. With guest Elizabeth Warren .

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Sen. Elizabeth Warren (D-MA) arrives in the Capitol for the on Tuesday, June 28, 2016.

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U.S. Sen. Elizabeth Warren (D-MA) (R) meets with Supreme Court nominee Merrick Garland (L), chief judge of the D.C. Circuit Court, April 14, 2016 on Capitol Hill in Washington, DC. Garland continued to place visits to Senate members after he was nominated by President Barack Obama to succeed the late Justice Antonin Scalia.

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Senator Elizabeth Warren, a Democrat from Massachusetts, listens as Janet Yellen, chair of the U.S. Federal Reserve, testifies during a Senate Banking Committee hearing in Washington, D.C., U.S., on Tuesday, June 21, 2016. Yellen offered a subtle change to her outlook from less than a week ago, saying she and her colleagues were on watch for whether, rather than when, the U.S. economy would show clear signs of improvement.

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Sen. Elizabeth Warren, D-Mass., greets guests during a rally on the east lawn of the Capitol to urge Senate Minority Leader Mitch McConnell, R-Ky., to hold a vote on the 'Seniors and Veterans Emergency Benefits Act,' March 9, 2016. The legislation would provide a one time payment to seniors, veterans and other SSI recipients who will not get a cost-of-living adjustment this year.

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Senators Bob Corker (L) and Elizabeth Warren (R) speak before a Senate Banking Committee on the semiannual monetary report to Congress hearing in Washington, USA on February 11, 2016.

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Senator Elizabeth Warren (D-MA), talks with Rep. Elijah Cummings (D-MD) in the House chamber prior to President Obama's State of the Union speech on Capitol Hill in Washington, February 12, 2013.

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The study also attempted to model the effect of tax revenue spent on government programs with varying productivity outcomes on workers, both neutral and positive. 

It projected Warren's wealth tax would be a drag on growth regardless of the program its spent on, though it would stifle growth at lesser rate if revenue was directed towards a program that boosted worker productivity.

If revenue is spent on a program that improved worker productivity levels, the tax plan would cut the nation's GDP by 1.1% in 2050. That's compared to the 2.1% rate if revenue went towards a program that didn't affect their productivity.

"An investment in early childhood education might lead to additional labor-market dynamics that boost the economy," the study said. But it also maintained that "a considerable amount of wealth inequality in the United States has historically been driven by entrepreneurship, a factor that has received very little attention in tax models and analysis."

The Warren campaign fired back at the analysis, pointing back to its $3.75 trillion forecast that was backed up by other economists and called Penn Wharton's conclusions "meaningless."

"This analysis does not study Elizabeth's actual plans — it does not account for the strong anti-evasion measures in her wealth tax and does not even attempt to analyze the specific investments Elizabeth is committed to making with the wealth tax revenue," Saloni Sharma, a campaign spokesperson, told Business Insider in an email. "This is an analysis of a different and worse plan than Elizabeth's, using unsupportable assumptions about how the economy works, and its conclusions are meaningless."   

The study is likely to face criticism among some economists who argue the Penn Wharton Budget Model downplays the possible economic boost from Warren's sweeping agenda.

Emmanuel Saez, an economist who helped design Warren's wealth tax plan, told Business Insider last month that the proposal wouldn't hurt the economy's production of goods and services.

"The Penn Wharton model assumes that the wealth tax reduces the capital stock of the economy as revenue is simply used to pay down debt," he said in an email. "But if revenue is used for productive public investments such as public infrastructure, it would not necessarily reduce the capital stock." 

Mark Zandi, an economist who also analyzed the wealth tax for the Massachussetts senator's campaign, wrote last month for CNN that "Warren's plans for child care, housing and green manufacturing would spur economic growth and produce more tax revenue."

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