A wealth tax is a tax that is imposed as a percentage of your net wealth, which is the value of all your assets, less any liabilities. Your assets include your money, investments, and property like homes or cars. Liabilities include what you owe, such as a mortgage or personal loan.
Definition and Examples 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 also include homes, automobiles, and personal property like jewelry or collectibles. Liabilities are debt like credit card debt, personal loans, or mortgages.
For example, 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.
If the tax percentage rate increases as wealth rises, the tax is said to be "progressive." In that case, you would pay a lower tax rate with a lower net wealth and a higher tax rate with higher net wealth. For example, if your net wealth was $10 million, you may have a 1.5% tax rate, and if your net wealth was $300 million you may have a tax rate of 2.5%.
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.
For example, in January 2019 as part of her campaign for president in 2020, Senator Elizabeth Warren, D-MA, proposed a version of a wealth tax on the nation’s richest households. 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.
On Oct. 27, 2021, Senate Finance Committee Chair Ron Wyden, D-OR, pitched the “billionaires income tax.” In his version of this kind of “wealth tax,” he proposed that a one-time tax be applied to roughly 700 taxpayers in the U.S. Individuals with more than $100 million in annual income, or with more than $1 billion in assets for three consecutive years, would have to pay.
Senator Wyden also proposed an annual tax on gains and losses of tradable assets, like stocks, owned by billionaires—known as unrealized gains. The proposal also stated that non-tradable assets, like real estate, would also be subject to an interest rate charge on any taxes deferred on its sale, but not an annual tax.
On Oct. 28, 2021, President Joe Biden released his framework for the Build Back Better plan, which also mentioned a sort of “wealth tax” on the nation’s wealthiest 0.02%. Though Biden’s framework did not explicitly state it as a “wealth tax,” it proposed a 5% tax rate on income above $10 million, and an additional 3% surtax on income over $25 million.
How a Wealth Tax Works
A wealth tax targets certain assets that are not normally subject to a federal tax, such as personal property, collectibles, and real estate used as primary residences. You 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 that year. For example, if you were subject to a 2% tax per year, but your assets only appreciated at a rate of 1% per year, you would lose wealth.
Senator Wyden's October 2021 proposal spared real estate and business interests from an annual wealth tax. Under his proposal, these assets would only be subject to a tax once when they are sold. At that time, the seller would have to pay capital gains tax as well as an interest charge.
Do I Need to Pay a Wealth Tax?
You only need to pay a wealth tax if your net wealth meets the criteria for the tax, and that tax is implemented by the government. Most taxpayers will not have to worry about a wealth tax at all because it targets a small percentage of the population with significant wealth.
According to The Tax Foundation, a wealth tax is implemented in only five Organization for Economic Co-operation and Development (OECD) countries:
All have tax rates that range from 0.15% to 3.75%. OECD indicated in 2018 that only four of its member countries imposed a wealth tax: France, Norway, Switzerland, and Spain. But back in 1990, there were 12 European countries with a wealth tax, according to the Cato Institute.
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, for example, move their assets to another country that does not levy this 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. So 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 also said that the tax would be difficult to enforce and would demand increased funding for the IRS.
- A wealth tax is a tax imposed on an individual’s net wealth. It is applied in addition to the other taxes, like income taxes, that they must pay annually.
- A wealth tax is typically a progressive tax, meaning its rate increases with the amount of a taxpayer’s net wealth, which is the value of the person’s assets minus their liabilities.
- Proposals from Senator Wyden, D-OR, and President Biden in October 2021 suggested a sort of wealth tax that would apply to extremely wealthy individuals in the U.S.