What Is Wealth Tax?
Wealth tax is a tax based on the market value of owned assets. Although many developed countries choose to tax wealth, the United States has historically favored taxing income. Recently, however, the immense and increasing disparity in wealth in the United States—as of 2018 the wealthiest 10% owned 70% of the country’s wealth while the richest 1% owned 32%, according to Federal Reserve Board—caused politicians such as Bernie Sanders and Elizabeth Warren to propose a wealth tax in the run-up to the 2020 Presidential election.
- Wealth tax is a tax levied on the value of held assets.
- A wealth tax is applicable to a variety of asset types including cash, bank deposits, shares, fixed assets, personal cars, assessed value of real property, pension plans, money funds, owner-occupied housing, and trusts.
- France, Portugal, and Spain all have wealth taxes.
Understanding Wealth Taxes
Wealth tax is also called “capital tax” or “equity tax” and is imposed on the wealth possessed by individuals in a country. The tax is usually on a person’s net worth, which is assets minus liabilities. These assets include (but are not limited to) cash, bank deposits, shares, fixed assets, personal cars, assessed value of real property, pension plans, money funds, owner-occupied housing, and trusts. An ad valorem tax on real estate and an intangible tax on financial assets are both examples of a wealth tax.
Not all countries have this type of tax. France, Portugal, and Spain are example of countries that do, but Austria, Denmark, Germany, Sweden, Finland, Iceland, and Luxembourg have abolished it in recent years. The United States does not impose a wealth tax. Instead, it imposes income and property taxes. However, some consider property tax a form of wealth tax, as the government taxes the same asset year after year.
Examples of a Wealth Tax
In effect, a wealth tax impacts the accumulated stock of purchasing power, while an income tax impacts the flow of assets or changes in stocks. 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% x $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%, the tax debt for the year will be 24% x $450,000 = $108,000.
In reality, wealth tax rates are not this high. In France, for example, the wealth tax used to apply to total worldwide assets. As of 2020, it only applied to real estate assets worth more than €800,000. If the value of those assets falls between €800,000 and €1,300,000, it is subject to a 0.5% tax. Rates continue to rise at certain 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. In Spain, as of 2019, a resident is affected by the wealth tax, which ranges from 0.2% to 3.45% if the value of their worldwide assets is above €700,000.
If a taxpayer is not a resident of a particular country, generally the wealth tax only applies to their holdings in that country.
Pros and Cons of a Wealth Tax
Wealth taxes are used by governments principally as a means of promoting social equity by reducing disparities in wealth holdings. While proponents believe this tax promotes equality, critics allege that it discourages the accumulation of wealth, which is thought to drive economic growth. Another issue with the wealth tax is that it also applies to people who earn a low income but have a high-value asset, such as a home. A farmer who earns little but whose land is highly valued, for example, may have trouble coming up with the money to pay a wealth tax.