What is a Wealth Tax & Will It Affect You?
Introduction
Adding a tax on wealth has been proposed in the tax plans of multiple 2020 Democratic presidential candidates, particularly Sens. Bernie Sanders and Elizabeth Warren. They estimate wealth taxes would raise billions annually in federal tax revenue. The new taxes would affect only the wealthiest Americans: people with a net worth of at least $32 million. That means 99% of U.S. taxpayers wouldn’t see any changes to their current taxes.
What is a Wealth Tax?
A wealth tax is a tax on someone’s entire net worth. That includes income, personal savings, investments, the value of property and real estate, as well as personal property such as jewelry or artwork. The U.S. has never had a true wealth tax. The most similar current tax is the federal estate tax. When someone passes on an estate, the portion of it that’s worth more than a certain value is taxed based on its overall value. However, this isn’t the same as a wealth tax because the entirety of the individual’s wealth is not taxed during their lifetime.
Image Description: Infographic explaining what a wealth tax is and how it works.
Why Some People Want a Wealth Tax
Economists and politicians have proposed creating a wealth tax because it could raise billions in annual tax revenue for the federal government. For example, estimates by Emmanuel Saez and Gabriel Zucman, economists who have advocated for a wealth tax to reduce inequality, show that Elizabeth Warren’s proposed wealth tax would raise as much as $198 billion for the 2019 tax year. Warren and other candidates plan to use the additional tax revenue to fund other programs like providing Medicare for all or lowering college tuition. The combination of these policies is meant to decrease income inequality in the U.S. by redistributing money from millionaires and billionaires to the Americans who need it most.
Image Description: Illustration showing how a wealth tax aims to reduce income inequality.
Who a Wealth Tax Would Affect
The two main wealth tax proposals are from Sens. Sanders and Warren. Their plans would affect Americans with a net worth of at least $32 million (Sanders’ plan) or at least $50 million (Warren’s plan). Anyone with a lower net worth would not pay the wealth tax. That means less than 1% of the U.S. population would see any changes to their current taxes.
Bernie Sanders’ Wealth Tax Plan
| Net Worth | Wealth Tax Rate |
|---|---|
| Less than $32 million | No wealth tax |
| $32 million to $50 million | 1% |
| $50 million to $250 million | 2% |
| $250 million to $500 million | 3% |
| $500 million to $1 billion | 4% |
| $1 billion to $2.5 billion | 5% |
| $2.5 billion to $5 billion | 6% |
| $5 billion to $10 billion | 7% |
| More than $10 billion | 8% |
Elizabeth Warren’s Wealth Tax Plan
| Net Worth | Wealth Tax Rate |
|---|---|
| Less than $50 million | No wealth tax |
| $50 million to $1 billion | 2% |
| More than $1 billion | 3% |
Image Description: Chart showing Bernie Sanders' and Elizabeth Warren's wealth tax brackets.
Would a Wealth Tax Work?
It’s unclear. The U.S. has never had a wealth tax, so it’s difficult to say whether or not one would work. Other countries that have tried have not been the most successful. For example, France recently repealed its wealth tax. The major challenge is enforcement. The IRS, which collects federal taxes, has had its funding and staffing cut over the past several years, hampering its ability to enforce tax rules. To improve enforcement, both Sanders and Warren have said they would increase IRS funding. Even if the IRS could afford to enforce tax collection, there are many loopholes that allow wealthy taxpayers to avoid paying taxes. Opponents of the wealth tax say decreasing tax avoidance and closing tax loopholes would increase tax revenue enough to make a wealth tax unnecessary.
Image Description: Infographic showing the challenges of enforcing a wealth tax.
Why a Wealth Tax May Never Happen
The specific language of the U.S. Constitution makes it unclear if a wealth tax is constitutional. Because the addition of new taxes is also a very partisan issue, any wealth tax would be challenged and likely find its way to the Supreme Court. Adding it to the tax code may require lawmakers to make an amendment to the Constitution. This isn’t unprecedented though. Congress passed the 16th Amendment in 1909 in order to create the federal income tax.
Image Description: Illustration showing the potential constitutional challenges of implementing a wealth tax.