What Is a Wealth Tax?
A wealth tax is a tax based on themarket value of assets owned by a taxpayer. Some developed countries choose to tax wealth, although the United States has historically relied on taxing annual income to raise revenue.
Recently, however, the immense and increasing disparity in wealth in the United States promptedpoliticians such as Sen. Bernie Sanders (I-Vt.) andSen. Elizabeth Warren (D-Mass.) to propose a wealth tax, in addition to the income tax, in the run-up to the 2020 presidential election in which they were both candidates. In March 2021, Warren introduced S.510, a revised version of her earlier proposal, to impose a tax on the net worth of very wealthy individuals.
Key Takeaways
- A wealth tax is a tax levied on the net fair market value ofa taxpayer’s assets.
- A wealth tax applies to the net fair market value of all or some of a variety of asset types held by a taxpayer, including cash, bank deposits, shares, fixed assets, personal cars, real property, pension plans, money funds, owner-occupied housing, and trusts.
- France, Norway, Spain, and Switzerland all have wealth taxes.
- U.S. politicians have proposed adding a wealth tax as a way to distribute the tax burden more fairly in a society with immense economic disparity.
Understanding Wealth Taxes
A wealth tax, also called capital tax or equity tax, is imposed on the wealth possessed by individuals. The tax usually applies to a person’snet worth, which is assets minus liabilities. These assets include (but are not limited to) cash, bank deposits, shares,fixed assets, personal cars, real property, pension plans, money funds, owner-occupied housing, and trusts.
Anad valorem taxon real estate and an intangible tax on financial assets are both examples of a wealth tax. Generally, countries that impose wealth taxes also impose income and other taxes.
Only four Organisation for Economic Co-operation and Development (OECD) countries currently levy a wealth tax: France, Norway, Spain, and Switzerland. Previously, in the early 1990s, 12 countries reportedly imposed a wealth tax, indicating that the popularity of this form of taxation is diminishing.
In the United States, federal and state governments do not impose wealth taxes. Instead, the U.S. imposes annual income andproperty taxes.However, some consider property tax a form of wealth tax, as the government taxes the same asset year after year. The U.S. also imposes an estate tax on the death of individuals owning high-value estates. However, that levy contributed roughly just 0.5% to total U.S. tax revenues in the past couple of years.
Examples of a Wealth Tax
In effect, a wealth tax impacts the net value of the assets accumulated over time and owned by a taxpayer as of the end of each tax year. Anincome taximpacts the flow of the additions in value that a taxpayer realizes, whether as earnings, investment returns such as interest, dividends, or rents, and/or profits on disposition of assets during the year.
Let’s look at an example of how the wealth tax differs from income tax. Assume a single taxpayer earns $120,000 annually and falls in the 24% tax bracket. That individual’s liability for the year will be 24% × $120,000 = $28,800. What is the tax liability if the government taxes wealth instead of income? If the taxpayer’s assessed net worth is $450,000 and the wealth tax is 24%, then the tax debt for the year will be 24% × $450,000 = $108,000.
In reality, annual wealth tax rates are significantly lower than annual income tax rates. In France, for example, the wealth tax used to apply to total worldwide assets. As of 2021, however, it only applied to real estate assets worth more than€800,000 ($904,166). If the value of those assets falls between €800,000 and €1,300,000, then it is subject to a 0.5% tax. Rates continue to rise at graduated thresholds—0.7%, 1%, 1.25%—until, finally, real estate assets over €10,000,000 are taxed at 1.5%. A wealth tax cap limits total taxes to 75% of income.
If a taxpayer is not a resident of a particular country, then the wealth tax generally only applies to their holdings in that country.
S.510: Sen. Warren’s Wealth Tax
Here’s what Sen. Warren is proposing, beginning with the 2023 tax year:
- Taxpayers subject to the wealth tax: those whose net assets (i.e., assets minus debt) are valued at over $50 million, based on their 2022 valuation
- Tax rate: 2% on net assets valued over $50 million and up to $1 billion; 3% on net assets in excess of $1 billion
- Assets subject to tax: all types of assets—anything that the wealthy person owns, including stock, real estate, boats, art, and more
- Revenue effect: S.510 is estimated to raise up to $3 trillion over 10 years and to apply to approximately 100,000 households.
Upon introduction, the bill had seven Senate co-sponsors: Sens. Kirsten Gillibrand, Mazie Hirono, Edward Markey, Jeff Merkley, Bernie Sanders, Brian Schatz, and Sheldon Whitehouse. An eighth senator, Alex Padilla, later became another co-sponsor. Two House co-sponsors, Reps. Brenda F. Boyle and Pramila Jayapal, support a companion bill in that chamber. All are Democrats.
Pros and Cons of a Wealth Tax
Proponents of wealth taxes believe this type of tax is more equitable than an income tax alone, particularly in societies with significant wealth disparity. They believe that a system that raises government revenue from both the income and the net assets of taxpayers promotes fairness and equality by taking into account taxpayers’ overall economic status, and thus, their ability to pay tax.
Critics allege that wealth taxes discourage the accumulation of wealth, which they contend drives economic growth. They also emphasize that wealth taxes are difficult to administer.
Administration and enforcement of a wealth tax present challenges not typically entailed in income taxes. The difficulty of determining the fair market value of assets that lack publicly available prices leads to valuation disputes between taxpayers and tax authorities. Uncertainty about valuation also could tempt some wealthy individuals to try tax evasion.
Direct wealth taxes have been repealed in several countries over the past few decades, partly because they tend to scare off wealthy people and hinder foreign investment.
Illiquid assets present another issue for a wealth tax. Owners of significant illiquid assets may lack ready cash to pay their wealth tax liability. This creates a problem for people who have low incomes and low liquid savings but own a high-value, illiquid asset, such as a home. Similarly, a farmer who earns little but owns land with a high value may have trouble coming up with the money to pay a wealth tax.
Some accommodations may be feasible to address administrative and cash flow issues—for example, allowing tax payments to be spread over a period of years or creating special treatment for specific asset categories such as business assets. However, exceptions could undermine the purpose that many attach to a wealth tax: structuring the overall tax system to make all taxpayers pay their fair share.
Does the United States have a wealth tax?
The United States imposes property and estate taxes but does not have a general wealth tax. However, that could soon change. U.S. Sen. Elizabeth Warren (D-Mass.) and some of her peers are trying to push through a bill that would see households and trusts worth over $50 million get taxed a percentage of their net worth (either 2% or 3%) each year.
What is good about a wealth tax?
Proponents view the wealth tax as a way to boost the government’s public spending coffers by taking extra money from those who don’t really need it. Such a tax generally only applies to the wealthiest, and it can be argued that the money it will cost them will have zero impact on their quality of life.
What is the downside of a wealth tax?
A wealth tax is difficult to administer, tends to encourage tax evasion, and has the potential to drive the wealthy away from countries that enforce it. These caveats, coupled with debates about how to implement it fairly, perhaps explain why so few countries in the world impose such a tax on their residents.
