Senator Elizabeth Warren’s proposed wealth tax could be a gift to an industry she has accused of looting Americans -- private equity.
The Democratic presidential hopeful’s plan to fund Medicare for All, denounced by prominent rich people like Bill Gates, hinges on a 6% annual levy on accumulated wealth in excess of $1 billion. One of the few ways for the extremely wealthy to preserve capital if such a tax were enacted would be putting their money into so-called alternative assets managed by firms such as Blackstone Group Inc., Carlyle Group LP and KKR & Co.
“A wealth tax is likely to result in some flow of funds away from public markets, where they can get easily valued, to investments where valuations are much harder,” said Wojciech Kopczuk, a Columbia University economics professor. “It’s possible that it will encourage higher risk, higher expected-return investments.”
Yolanda Plaza-Charres, director of investment strategy and solutions for SEI Private Wealth Management, was more specific.
“We believe that such a tax would increase the use of alternative investments in the portfolios of the wealthy and ultra-wealthy,” she said in an email response to questions.
For Warren, that would amount to an unintended consequence -- one that she’s tried to address. In July, the Massachusetts lawmaker introduced the “Stop Wall Street Looting Act” to rein in private equity. The proposal would hold buyout firms liable for the debts of their portfolio companies, an idea that would be “industry-destroying,” according to Argus Research Corp. analyst Steve Biggar.
Higher Returns
Gabriel Zucman, a University of California at Berkeley professor and an economic adviser for the campaigns of Warren and Senator Bernie Sanders, said it’s unclear whether the wealth tax “in itself would affect the portfolio allocation of wealthy individuals.”
“If they could get higher returns by investing in private equity, they should already be doing this today,” he said in an email.
The Warren campaign didn’t respond to requests for comment.
The very wealthy often put liquid capital in low-risk investments such as U.S. Treasuries and municipal bonds to keep their fortunes from eroding. That could change, however, in a financial landscape that requires a 6% return just to break even.