What Is a Wealth Tax?
Let me explain directly: a wealth tax applies to the net fair market value of all or some of your various asset types, including cash, bank deposits, shares, fixed assets, personal cars, real property, pension plans, money funds, owner-occupied housing, and trusts.
You need to understand that a wealth tax is based on the market value of assets you currently own, unlike taxes on asset sales, income, or just real estate. Some developed countries use this to tax wealth, but the United States has historically focused on taxing annual income for revenue.
Key Takeaways
- A wealth tax is levied on the net fair market value of your assets.
- Countries like France, Norway, Spain, and Switzerland have wealth taxes.
- U.S. politicians have proposed wealth taxes to distribute the burden more fairly amid economic disparity.
Understanding Wealth Taxes
I'm telling you, a wealth tax—also known as capital tax or equity tax—is imposed on the wealth you possess. It applies to your net worth, which is assets minus liabilities. These include cash, bank deposits, shares, fixed assets, personal cars, real property, pension plans, money funds, owner-occupied housing, and trusts.
Examples include ad valorem taxes on real estate and intangible taxes on financial assets. Countries with wealth taxes usually have income and other taxes too.
Only four OECD countries levy a net wealth tax now: France, Norway, Spain, and Switzerland. Back in the early 1990s, 12 countries did, showing this tax is losing popularity.
In 2024, Brazil proposed a 2% global wealth tax affecting 3,000 of the world's wealthiest, but its feasibility is uncertain without support from places like the U.S.
Here in the U.S., we don't have federal or state wealth taxes; we use annual income and property taxes instead. Some see property tax as a form of wealth tax since it hits the same asset yearly. We also have an estate tax on high-value estates at death, but it contributes little—only 0.64% of GDP in 2024 from gift and estate taxes.
During the 2020 election, wealth disparity led politicians like Bernie Sanders and Elizabeth Warren to propose wealth taxes alongside income taxes. In March 2021, Warren introduced S.510 for taxing high net worth, and though it failed, she reintroduced a version in 2024, with taxes central to presidential platforms.
Examples of a Wealth Tax
A wealth tax hits the net value of assets you've accumulated, owned at year's end. Income tax, by contrast, taxes value additions like earnings, returns, or profits during the year.
Consider this example: if you earn $120,000 annually in the 24% bracket, your income tax is 24% of $120,000, or $28,800. But if taxed on wealth and your net worth is $450,000 at 24%, it's $108,000. In practice, wealth tax rates are much lower than income tax rates.
In France, as of 2023, it applies only to real estate over €1.3 million, starting calculations at €800,000. Rates start at 0.5% up to 1.5% for assets over €10 million, with a cap at 75% of income.
If you're not a resident, the tax usually only applies to holdings in that country.
Sen. Warren’s Wealth Tax Proposal
Let me outline Warren's 2021 proposal, set for 2023: it targets those with net assets over $50 million based on 2022 values, at 2% on over $50 million up to $1 billion, and 3% above that. It covers all assets like stock, real estate, boats, art. Estimated to raise $3 trillion over 10 years, affecting 100,000 households.
It had Senate co-sponsors like Gillibrand, Hirono, Markey, Merkley, Sanders, Schatz, Whitehouse, and later Padilla. House companions by Boyle and Jayapal.
The bill died in committee, but Warren reintroduced it in March 2024, with similar House legislation.
Pros and Cons of a Wealth Tax
Proponents say it's more equitable than income tax alone, especially with wealth gaps. It considers overall economic status for fairer taxation.
Critics argue it discourages wealth accumulation, which drives growth, and it's hard to administer. Valuing non-public assets leads to disputes and evasion risks.
Direct wealth taxes have been repealed in countries because they scare off the wealthy and hinder investment.
Illiquid assets pose issues; owners might lack cash to pay, like low-income people with valuable homes or farmers with land. Accommodations like deferred payments or exemptions could help but might undermine fairness.
Does the United States Have a Wealth Tax?
We have property and estate taxes, but no general wealth tax. That might change with Warren's bill proposing 2% or 3% on net worth over $50 million for households and trusts.
What Is Good About a Wealth Tax?
It boosts government revenue from the wealthiest, who arguably won't feel the impact on their lives.
What Is the Downside of a Wealth Tax?
It's tough to administer, encourages evasion, and can drive the wealthy away, explaining why few countries use it.
The Bottom Line
A wealth tax levies on your total asset value, unlike income, real estate, or sales taxes. It's in some European countries and proposed in the U.S. to address wealth inequality.
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