The raft of investment taxes that Democratic presidential candidate Elizabeth Warren plans to levy to pay for her social programs would advantage foreign investors, a side effect that would run counter to her goal, shared with President Trump, of lowering the trade deficit.
To pay for “Medicare for all” and other major new government benefits, Warren would radically increase taxes on investments made by rich taxpayers, including through a major new wealth tax.
By taxing American investors, Warren would give a boost to foreign investors looking to buy U.S. assets — stocks, real estate, and so on. The spike in foreign investment would also entail an increase in the trade deficit.
“Foreign ownership of American companies accrues benefits to foreigners,” said Ric Edelman, a top wealth adviser for rich individuals. “This weakens the strength of Americans in terms of global dominance and interferes with the ability of ordinary Americans to save and invest for the future.”
To the extent that Warren’s tax plan privileges foreign investors, “the trade deficit will go up and a greater share of American assets will be owned by those in other countries like China, Germany,” said Kyle Pomerleau, an economist at the American Enterprise Institute, a right-of-center think tank.
The trade deficit would rise because, to invest in the United States, foreigners must get dollars. Higher demand for dollars raises the exchange rate, making foreign goods relatively cheaper and sales of U.S. goods to other countries relatively more expensive.
“Foreign dollars that would otherwise be used to buy American exports would be used to invest in our economy instead,” said Bryan Riley, a director of the Free Trade Initiative at the National Taxpayers Union Foundation. “When our foreign counterparts invest in our economy instead of exports, that leads to a trade deficit. You can’t use the same dollar to do both, it’s an either/or.”
Trump has made lowering the U.S. trade deficit a cornerstone of his agenda and is pursuing multiple trade deal renegotiations toward that purpose.
Warren herself has identified the trade deficit, which has risen to $481.3 billion in the first nine months of this year, as a problem. In a campaign plan, under the banner of “Economic Patriotism,” Warren called for actively managing the dollar to reduce the trade deficit and increase exports.
While economists generally don’t see trade deficits as a problem, some analysts argue that they can cost the country good jobs, because they mean that more manufactured goods are sourced abroad rather than domestically, eliminating manufacturing jobs in places like the Rust Belt. Former Joe Biden economic adviser Jared Bernstein, for instance, has written that “trade deficits mean the loss of good jobs, wages, and incomes for those in firms hit by competition from imports.”
Bernstein, however, now a fellow at the left-of-center Center on Budget and Policy Priorities, told the Washington Examiner that he didn’t think that Warren’s tax policies would influence investors.
Still, multiple other economists told the Washington Examiner that the hikes in investment taxes would push up the trade deficit. While the taxes Warren is proposing would apply to the rich, they would be substantial: $2 trillion over 10 years altogether. They include a new 14.8% Social Security tax on all investment income of individuals earning more than $250,000. Also, she would raise a significant sum by taxing the capital gains of the top 1% of households at a higher rate — the 37% rate on ordinary income, rather than the preferential 20% tax rate for long-term capital gains. She would also tax unrealized capital gains each year, rather than waiting for the gains to be realized in a sale.
In addition, Warren would lower the estate tax rate, which taxes the total wealth and assets that a person owns when they die, from $11.4 million down to $3.5 million in order to collect more revenue.
Lastly, she would impose a new wealth tax that would make households “pay an annual 2% tax on every dollar of net worth above $50 million and a 6% tax on every dollar of net worth above $1 billion” — in effect, an additional tax on investments.
When asked for comment on this story, a Warren spokeswoman only said that “Elizabeth Warren’s economic agenda returns power to American workers and puts money in their pockets, spurring greater demand and economic growth.”
History has shown that higher investment taxes do provide an advantage to foreign investors. During the early 1990s and late 2000s, when Congress raised the capital gains rate, it did indeed result in a significant flow of investments from abroad, noted Garrett Watson of the Tax Foundation, a center-right think tank.
