Trump’s Proposed Wealth Tax and Incentives

In the last couple of days, I've been going through old exams and problem sets for my economics courses that I taught from the mid-1980s until a couple of years ago. I found a problem I put on a problem set that readers might find interesting.

Here's the background, and it's background I gave the students. In 1999, Donald Trump proposed a one-time tax on Americans' wealth. His proposed tax rate would have been 14.25 percent and it would have been on individuals and trusts worth $10 million or more.

Shortly after, Bruce Bartlett, then a senior fellow with the National Center for Policy Analysis, wrote an op/ed in the Wall Street Journal analyzing Trump 's proposal. Here's the part of his op/ed that I asked my students about:

Regardless of the rate imposed, a plan like Mr. Trump's would lead to an enormous amount of income shifting. Presumably, someone with assets of $9,999,999.99 would pay nothing, while someone with $10 million would pay $1.425 million. That means that anyone with assets between $10 million and $11.425 million would have an enormous incentive to consume or simply give away $1.425 million.

Here's the question I asked:

Is he [Bartlett] correct? Explain why or why not. [HINT: think carefully on the margin.

Take a shot, but, as Bryan Caplan likes to say, show your work.

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