DEFINITION of Wealth Tax

Wealth tax is a tax based on the market value of assets that are owned. Although many developed countries choose to tax wealth, the United States has generally favored taxing income.

Wealth tax is also called capital tax or equity tax.

BREAKING DOWN Wealth Tax

Wealth tax is imposed on the wealth possessed by individuals in a country. The tax is 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.

France, Portugal, and Spain are examples of countries with wealth taxes. In France, there is a wealth tax cap in place that ensures that total taxes do not exceed 75% of income. Not all countries have this type of tax; Austria, Denmark, Germany, Sweden, Spain, Finland, Iceland, and Luxenberg have abolished it in recent years. The United States doesn't impose wealth tax but requires income and property taxes. Some consider property tax a form of wealth tax since the government taxes the same asset year over year.

In effect, a wealth tax impacts the accumulated stock of purchasing power, and an income tax impacts the flow of assets or change in stock. Let’s look at an example of how the wealth tax differs from the income tax. Assume a single taxpayer earns $120,000 annually and falls in the 28% tax bracket. His tax liability for the year will be 28% x $120,000 = $33,600. But what if the government in his country taxes wealth, instead of income? If his assessed net worth is $450,000 and the wealth tax is 28%, his tax debt for the year will be 28% x $450,000 = $126,000. In reality, wealth tax rates are not this high. In France, for example, the wealth tax only applies to taxable assets worth over €800,000. If the value of assets falls between €800,000 and €1,300,000, it is subject to a 0.50% tax. Assets over €10,000,000 are taxed at 1.5%. In Spain, a resident is affected by the wealth tax, which ranges from 0.20% to 3.5%, if the value of his or her worldwide assets is above €700,000.

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 state that it discourages accumulation of wealth, which is thought to drive economic growth. The problem with the wealth tax is that it also applies to people who earn low income but have a high-value asset, such as a home. For example, a farmer who earns little but whose land is highly valued may have trouble coming up with money to pay the taxes.