How a Wealth Tax Works
A wealth tax targets certain assets that aren’t normally subject to a federal tax, such as personal property, collectibles, and real estate used as primary residences. You’d pay a wealth tax in addition to other taxes, such as income tax. A wealth tax can potentially deplete an individual’s wealth if they’re subject to a tax rate that’s higher than the rate at which their fortune grows in a given year. You would lose wealth if you were subject to a 2% tax per year, but your assets only appreciated at a rate of 1% per year. Senator Ron Wyden proposed a wealth tax in October 2021. The proposal spared real estate and business interests from an annual wealth tax. These assets would only be subject to a tax once when they’re sold. The seller would have to pay capital gains tax as well as an interest charge at that time.
Example of a Wealth Tax
A wealth tax is a tax levied upon a taxpayer’s net worth, which is the sum of their assets minus their liabilities. Assets can include investments, such as stocks and bonds, and bank accounts. They can include homes, automobiles, and personal property like jewelry or collectibles. Liabilities are debts such as credit card balances, personal loans, or mortgages. Say you own $36 million in cash, investments, and other assets, and you owe $6 million in debt. Your net wealth would be $30 million. A wealth tax, which would be imposed annually, would take a percentage of your wealth at a specific tax rate. Assuming a 2% tax rate, you would be obligated to pay $600,000 (2% x $30 million = $600,000), although an exemption amount typically applies.
Wealth Taxes in the U.S.
The wealth tax has been a point of debate in the U.S. for decades, with various politicians proposing specific ways to tax people in the U.S. who have very high incomes and who own millions in assets. Senator Elizabeth Warren, D-MA, proposed a version of a wealth tax on the nation’s richest households in January 2019 as part of her campaign for president in 2020. Her proposal targeted what she referred to as “runaway wealth concentration” among some Americans. The tax she proposed would have been applied at a rate of 2% on net wealth over $50 million, and at 3% (later revised to 6%) on net wealth over $1 billion. Senator Bernie Sanders, I-VT, also proposed a wealth tax in September 2019. It started at 1% and rose to 8% on net wealth thresholds of more than $5 billion. Senate Finance Committee Chair Ron Wyden, D-OR, pitched the “billionaires income tax" on Oct. 27, 2021. He proposed in his version of a wealth tax that a one-time tax be applied to roughly 700 taxpayers in the U.S., specifically individuals with more than $100 million in annual income, or with more than $1 billion in assets for three consecutive years. Senator Wyden also proposed an annual tax on gains and losses of tradable assets owned by billionaires, such as stocks. These were known as unrealized gains. The proposal also stated that non-tradable assets such as real estate would also be subject to an interest rate charge on any taxes deferred on its sale, but not an annual tax. President Joe Biden released his framework for the Build Back Better plan on Oct. 28, 2021. This plan also mentioned a sort of “wealth tax” on the nation’s wealthiest 0.02%. Biden’s framework did not explicitly state that it was a “wealth tax,” but it proposed a 5% tax rate on income above $10 million, and an additional 3% surtax on income over $25 million.
Do I Have To Pay a Wealth Tax?
You only need to pay a wealth tax if your net wealth meets the criteria for the tax, and if that tax is implemented by the government. Most taxpayers don’t have to worry about a wealth tax because it targets just a small percentage of the population who have significant wealth. A wealth tax is implemented in only five Organization for Economic Co-operation and Development (OECD) countries, according to the Tax Foundation. Those countries are:
FranceSpainNorwaySwitzerlandColumbia
All have tax rates that range from 0.15% to 3.75%.
Criticism of Wealth Taxes
A major criticism of wealth taxes is that they could cause wealthier taxpayers to engage in tax evasion to avoid a bigger tax bill. They might move their assets to another country that doesn’t levy this type of tax, or they might transfer ownership to private foundations that wouldn’t be subject to a wealth tax. Another point critics have raised is that a wealth tax could harm rather than help the average worker in the U.S. The reasoning is that the wealthiest individuals tend to hold business assets that generate jobs and income for other people. The wealth tax could potentially take away money for jobs and income, such as if it forced wealthy business owners to hold that money somewhere other than in the U.S. It could potentially undermine the nation’s economic stability and growth. Finally, critics have said that the tax would be difficult to enforce and would demand increased funding for the Internal Revenue Service (IRS).
