Donald Trump’s Forgotten Plan to Tax Wealth
There is a renewed effort to impose a wealth tax on Americans. Several bills in Congress would tax and redistribute wealth supposedly to benefit the poor and “ensure the wealthy pay their fair share,” in the words of President Joe Biden. Biden and U.S. Senator Elizabeth Warren (D–Mass.) have offered the most widely discussed proposals for taxing wealth.
Largely forgotten, however, is that Donald Trump floated a plan to tax wealth 20 years before Warren’s when he was considering a presidential run as the Reform Party candidate in 1999. Trump proposed a hefty, one-time, flat tax of 14.25 percent on individuals’ and trusts’ net worth starting at $10 million.
Trump’s wealth tax would have raised an estimated $5.7 trillion in federal revenue, which he wanted to use to pay off the entire federal debt at the time, thereby eliminating annual debt-service costs of $200 billion. He wanted to use the debt-service-cost savings to finance a $100 billion middle-class tax cut and transfer $100 billion into Social Security every year.
“By my calculations,” Trump said at the time, “1 percent of Americans, who control 90 percent of the wealth in this country, would be affected by my plan. The other 99 percent of the people would get deep reductions in their federal income taxes. . . . It is a win-win for the American people, an idea no conventional politician would have the guts to put forward.”
While eliminating the federal debt is a worthy goal, Trump’s plan was ill-conceived in two ways. First, the federal debt can be paid off without imposing a new tax, especially one on wealth. Wealth taxation is seriously flawed, which I explain in my recent article titled, “Proposed Wealth Taxation Threatens Jobs, Savings, and Privacy,” published in Bloomberg Tax’s Tax Management Memorandum (June 2024).
In a nutshell, wealth taxation:
- Is complex and costly to implement.
- Discourages investment, innovation, and entrepreneurship.
- Is quickly viewed as unfair because special exemptions are doled out to politically connected people.
- Undermines privacy, private property, economic growth, and wage growth among ordinary workers.
- Can cost more to implement than the revenue it raises because, among other factors, capital and residents flee to other nations.
- Is unconstitutional as typically designed.
Wealth taxation would be bad for America.
Second, Trump claimed in 1999 that his wealth tax would “make this country entirely debt free as we enter the next millennium.” Eliminating the federal debt one time, however, does nothing to prevent future budget deficits and future debt accumulation. Without something more, Trump’s plan would have reset federal debt to zero, where it would start growing again, requiring another round of wealth taxation in the future and another after that and so on.
In their 1977 book titled Democracy in Deficit: The Political Legacy of Lord Keynes, Nobel laureate economist James M. Buchanan and economist Richard E. Wagner argued persuasively that the “Keynesian revolution” in economics, starting in the 1930s and continuing beyond, represented a “shift in ideas on public debt” that was “vital in securing acquiescence to deficit financing. There was no longer any reason for opposing deficit financing on basically moral grounds.” The ascension of Keynesian prescriptions among economists, politicians, and members of the media caused a shift in the “fiscal constitution,” resulting in soaring federal government spending and deficits, even in peacetime, and it set the stage for the debt explosion and price inflation that followed.
Before the 1930s, the prevailing ethos among policymakers and the public was that spending should be restrained and that racking up budget deficits and public debt was both immoral and harmful to the economy, especially in the long run. That ethos “constituted an unwritten element of our Constitution,” wrote Richard E. Wagner and Robert D. Tollison in Balanced Budgets, Fiscal Responsibility, and the Constitution (1980). Moreover, James Buchanan emphasized in Liberty, Market and State (1986) that Keynesianism ended the “Victorian fiscal morality” of balanced budgets and small debt, and that doing so resulted in the “modern era of profligacy.”
In 1977, when Democracy in Deficit was published, the federal debt was $699 billion ($3.49 trillion in 2023 dollars), according to the U.S. Department of the Treasury, equivalent to 35 percent of annual gross domestic product (GDP).
In 1999, when Trump first proposed his self-styled debt-eliminating wealth tax, the public debt was $5.66 trillion ($10.33 trillion in 2023 dollars), 60 percent of GDP.
Today, debt is $34.95 trillion, about 123 percent of GDP. The World Bank considers a country to be in fiscal trouble if its long-term public debt-to-GDP ratio exceeds 77 percent. A country’s annual real GDP growth rate declines by 0.02 percentage points for each percentage point above 77 percent. The cumulative effect over time on real GDP growth and prosperity can be significant.
Debt levels have increased 10-fold in real terms since 1977, a staggering amount. Depending on whose estimate you trust, the national debt increased by $6.5 trillion during Trump’s presidency alone, according to the conservative Heritage Foundation, or $8.4 trillion, according to the left-leaning Committee for a Responsible Federal Budget.
Because moral opposition to deficits and debt has been eroded by Keynesianism, in its place, Buchanan and Wagner proposed that the U.S. Constitution be amended to include a formal balanced-budget requirement as follows:
1. The president shall be required to present annually to Congress a budget that projects federal outlays equivalent to federal revenues.
2. The Congress, both in its initial budgetary review, and in its subsequent approval, shall be required to act within the limits of a budget that projects federal outlays equivalent to federal revenues. (There is, of course, no requirement that the congressional budget be the same as that submitted by the president.)
3. In the event that projections prove in error, and a budget deficit beyond specified limits occurs, federal outlays shall be automatically adjusted downward to restore projected balance within a period of three months. If a budget surplus occurs, funds shall be utilized for retirement of national debt.
4. Provisions of this amendment shall be made fully effective within five years of its adoption. To achieve an orderly transition to full implementation, annual budget deficits shall be reduced by not less than 20 percent per year in each of the five years subsequent to the adoption of the amendment. Departure from this 20-percent rule for annual adjustment downward in the size of the deficit shall be treated in the same manner as departure from budget balance upon full implementation.
5. Provisions of this amendment may be waived only in times of national emergency, as declared by two-thirds of both houses of Congress, and approved by the president. Declarations of national emergency shall expire automatically after one year.
Buchanan and Wagner argued that a constitutional balanced-budget amendment was urgently needed to reestablish fiscal sanity. The amendment would, among other things, act to constrain government outlays and future inflation, prevent malinvestment, end government crowding out of investment capital from the private sector, and enable greater individual autonomy in spending decisions and, thus, greater individual liberty. In their opinion, such an amendment is the best way (but not perfect) to reestablish fiscal stability. It is important to keep in mind, however, that politicians and courts have a track record throughout American history of devising clever end-runs around constitutional protections.
Nevertheless, Donald Trump’s poorly conceived plan to tax wealth did not include a balanced-budget requirement; thus, deficits and debt accumulation would have been allowed to run free, as they have. Rather than being a one-time event, wealth taxation would have likely become a regular feature of American life as deficits, debts, and overspending continue unabated.
Donald Trump’s plan to tax wealth was a bad idea in 1999, and it’s still a bad idea today, unworthy of resurrection.
