Critics of wealth tax rely on outdated economic models -the risk of the disad starts at ZERO and goes down from there

(Josh, ChiefEconomist@EconomicPolicyInstitute, https://www.epi.org/blog/analyses-claiming-that-taxes-on-millionaires-and-billionaires-will-slow-economic-growth-are-fundamentally-flawed/, 11-21)

In recent weeks, a number of policy analyses of progressive economic policies—a surtax on high-incomes, a wealth tax, and Social Security expansion—have claimed these policies would damage economic growth. Policymakers should give these analyses very little weight in debates about these issues, for a number of reasons. First, and most important, is the fact that all of these analyses are grounded in an economic view of the world that sees growth as constrained by the economy’s productive capacity (or the supply side of the economy) and not by the spending of households, businesses and government (the economy’s demand side). These estimates have other problems too—they are not even particularly convincing supply-side estimates and even if the economy’s growth really was constrained by supply, these estimates would still be misleading about the effects of these policies on welfare. But the biggest reason why policymakers should give these analyses zero weight is because they assume that growth is almost never demand-constrained. Before the Great Recession, the assumption that growth was nearly always supply constrained was almost universally held by economists and macroeconomic policymakers. It was recognized that demand (or aggregate spending) could occasionally be too weak to fully employ the economy’s productive capacity and hence cause rising unemployment, but it was generally thought that such periods were rare and would end quickly after the Federal Reserve sensibly cut interest rates. Because shortfalls of demand relative to supply were rare and short and easy to fix, the reasoning went, any real constraint on the economy’s growth over the long-run must be the pace of growth of supply. Growth in supply is generally driven by growth in the quality of the workforce, the productive stock of plants, equipment and research, and growth in technological progress, which together lead to growing productivity—or the amount of income or output generated in an average hour of work. The assumption that supply constraints are much more likely to bind overall growth than demand constraints drove almost all macroeconomic policymaking in the decades before the Great Recession. For example, the Federal Reserve for decades feared lower unemployment far more than lower inflation. Lower unemployment was a signal that demand was rising relative to supply, and if one thinks growth was generally supply-constrained, this meant that demand growth would quickly outstrip supply growth and lead to rising inflation. Lower inflation, conversely, meant that supply growth was outpacing demand growth—but that was always a temporary and easy-to-fix condition. The decades-long bipartisan overreaction to rising federal budget deficits is also a byproduct of assuming the economy’s growth is supply constrained. Deficits boost demand growth. If one assumes that demand is generally marching in lock-step with supply, then larger deficits that boost demand imply that supply constraints will soon bind and cause inflation (or interest rate increases). Smaller deficits, conversely, reduce demand growth. But if the danger of demand growth slowing too much is low and easy-to-fix, then that’s not a problem. The experience of the last decade has done much to shake this belief that demand-constrained growth is nothing to worry about and that supply-constrained growth should be the default presumption for policy analysis. For example, the Federal Reserve has cut interest rates to spur demand growth three times in the past six months with unemployment below 3.8 percent. They certainly seem to be acting (correctly) as if demand-constrained growth is a real problem. Prominent macroeconomists and former policymakers like Olivier Blanchard, Jason Furman, and Lawrence Summers have all written in recent months that efforts to close budget deficits should not be a high policy priority, largely because there is no evidence that supply constraints are binding. These reversals of policy presumption are evidence-based and admirable. Yet the decades-long inertia of policy evaluation done in a framework of supply-constrained growth is hard to stop—and so we have the recent parade of analyses claiming that a number of progressive initiatives will slow the economy by dragging on supply side growth. The Tax Foundation, for example, has estimated that a ten percentage point surcharge on incomes over $2 million—a change that would only affect the highest-income 0.1 percent of households—will slow growth enough to cost 118,000 jobs by the end of the decade. A still-preliminary analysis of presidential candidate Elizabeth Warren’s wealth tax—a change that would affect only the wealthiest 0.1 percent of households—was estimated by the Penn-Wharton Budget Model team to slow growth by more than 0.2 percentage points each year over the next decade. The Penn-Wharton Budget Model project’s assessment of a plan by Representative John Larson (D-Conn. ) to expand Social Security benefits was analyzed by my colleague Monique Morrissey previously, so I will largely leave that aside in this post. Each of these results is driven entirely by the assumption that growth is supply-constrained. In the case of both the high-income surcharge and the wealth tax, the taxes are assumed to reduce labor supply and savings (which raises the “user cost of capital” and hence leads to reduced investment). But over the past decade, there is no evidence that labor supply has been a constraint on growth. Unemployment rates fell steadily in the years between 2010 and 2018. Even as the decline in unemployment moderated over the past year, labor force participation rose smartly. Additionally, the share of prime-age adults with jobs remains below its 2000 level—and there’s no particular reason to be sure that 2000 level is a hard upper bound. The clearest sign that availability of labor has become a supply-side constraint would be rapid wage growth— and that has certainly not happened. There is even less evidence that insufficient savings or a high user cost of capital have been constraints on growth of the capital stock or will become constraints anytime soon. Interest rates—the simplest proxy for the scarcity of savings and high user costs of capital – have been severely depressed for years, and interest rate projections have overestimated their growth since the late 1990s. Corporate profitability has been extraordinarily high over the 2000s, even as investment has been weak.