Warren Loses the Lawyers

Elizabeth Warren has come up with a plan to pay for her “Medicare For All” proposal, which has a price tag in the tens of trillions of dollars. Part of the plan is a “wealth tax,” which means taxing unrealized capital gains at ordinary income rates. Combined with other elements of her plan, this implies that unrealized capital gains will be taxed at more than 50%. Megan McArdle wonders whether Warren has thought through the implications:

“HENRY” means “high earner, not rich yet.” A commenter asks how the tax gets to be more than 50%; Megan responds:

The mind boggles. I’ve got some losers in my portfolio; is Liz willing to take them off my hands? What if I pay more than 50% on unrealized appreciation, and then the stock drops? Do I get my money back? Warren’s whole idea is so obviously stupid and incapable of implementation that one is tempted to laugh.

I’ll tell you this, though: lawyers are a core constituency of the Democratic Party, and nearly every lawyer in the U.S. (along with many others, of course) tolerates paying 50% marginal tax rates on his or her income only because a chunk of that income is sheltered in 401(k)s. The 401(k) and the house are where the vast majority of high income earners accumulate wealth. Warren’s proposal essentially destroys the ability to build wealth via retirement savings. This may be OK with those who are already rich, like Elizabeth Warren, but it will be anathema to younger people who are trying to become wealthy.

That applies to a lot of people, but let’s stay with lawyers for now, the group I know best. Assessing a “wealth tax” that invades previously tax-free 401(k)s at a 50%+ rate will destroy Warren’s support in what has been, in recent years, a core Democratic Party constituency. “Wall Street,” i.e. the financial industry, has already warned that if Warren is the Democrats’ nominee, it will not support her. That in itself is seismic; no industry has ever supported a politician to the extent that Wall Street supported Barack Obama and Hillary Clinton. But the loss of support from America’s lawyers might be even more deadly to the Democratic Party.

It’s something to keep in mind as Elizabeth Warren continues her triumphant march to the Democratic nomination. One unfortunate thing about targeting lawyers (and their often-liberal wives) is that many of them actually understand the implications of policy proposals. Here as usual, understanding is fatal to Liz Warren.

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