There has been much talk this campaign year about a “Wealth Tax” and whether it would impact the wallets of middle and lower-income America, even if its name doesn’t.
Rest easy. You need a net worth of at least $16 million to have any of the published proposals impact your tax filing next April and there aren’t any middle and lower-income families in America with that much in the bank.
What Is a Wealth Tax?
A wealth tax is a tax on accumulated riches – not income earned in the last year. Accumulated wealth. Money, property, investments, etc. that you’ve compiled, probably over several years and when you add it up, comes to $16 million or more.
Switzerland came up with the idea of a wealth tax in 1840 and though Donald Trump himself once proposed a one-time wealth tax in 1999, the idea was not widely discussed in the U.S. until the 2020 primaries, when Sens. Elizabeth Warren (D-Ma) and Bernie Sanders (I-VT) proposed different plans on taxing wealth.
Warren estimated that her wealth tax could generate $4 trillion over 10 years. Other economists said it would be between $2.6 trillion and $3 trillion. Sanders’ plan was estimated to generate $3.3 trillion by economists.
Both said their tax was to address the issue of income inequality in the United States. The fact the federal government might collect enough to help pay down the national debt is a bonus we’ll talk about later.
Wealth Tax Proposals
Sen. Warren proposed a 2% tax on household wealth above $50 million, which means paying two cents on every dollar of net worth above $50 million. So, for example, if your net worth is $100 million, you’d pay $1 million in taxes (100m – 50m x .02 = $1 million).
Warren increased the rate to 3% for people whose net worth was above $1 billion. So, if your net worth is $2 billion, you pay $30 million in tax. That figure increased to 6% when she proposed her Medicare for All plan.
Sanders’ proposal came in 2019. He wanted a 1% tax on wealth above $32 million for married couples (or $16 million for singles); it increased to 8% as wealth increased, though the highest percentile only hit those with wealth over $10 billion.
That sounds like a lot of dough flying out of somebody’s bank account – and it is! – but the billionaires’ tax applies to only 750 people or so in the U.S. There are just over 70,000 in the $50 million-plus category, and around one million Americans are worth $16 million or more.
So altogether, we’re talking about less than 1% — maybe 3 people out of 1,000 – who would get hit by a wealth tax.
And for comparison purposes, asking the guy worth $2 billion to pay $30 million in tax would be like asking someone with a dollar in his hand for 1.5 cents. Neither guy will miss it!
Will Taxes on the Wealthy Increase?
Donald Trump once proposed a wealth tax – in 1999. Running as a candidate for the nomination of the Reform Party, Trump proposed a one-time 14.25% tax on net worth above $10 million, less the value of the taxpayer’s principal home. His idea, he said then, was to wipe out the debt (then at $5.66 trillion), help Social Security and give the middle class a tax cut with the increased revenue. It was a noteworthy progressive idea.
“By my calculations, 1 percent of Americans, who control 90 percent of the wealth in this country, would be affected by my plan,” Trump told CNN at the time, sounding much like Warren and Sanders.
That was then. Now, do not expect the wealth tax to become law anytime soon.
As President, Trump has not favored it, and the Tax Cuts and Jobs Act bill he signed in 2017 lowered taxes for the wealthy.
On the Democrat’s side, Joe Biden’s tax plan includes an income tax increase on those earning more than $400,000 annually. That’s “earned income,” not accumulated wealth and Biden says it’s hitting only the top 1% or 2% of wage earners.
His plan does not include a wealth tax, nor does it raise taxes on those making less than $400,000.
At this point, it seems highly unlikely that any wealth tax would be enacted.
State Taxes on the Wealthy
State government revenues have been hit hard by the pandemic, causing at least nine to look at imposing a wealth tax.
In April alone, states paid $48 billion in unemployment benefits, while losing revenues from businesses that had to shut down temporarily or close permanently. Some states are approaching a crisis. Unlike the Federal Government, states cannot run deficits, so they have to find a way to make up for lost revenue to balance their budgets.
Some states already have started discussing a wealth tax to offset the heavy economic burden. New Jersey passed a millionaire’s tax that raised the income tax rate for those making more than $1 million. California has discussed a 0.40% wealth tax on those who are worth more than $30 million. That’s taking money from Rodeo Drive, not Elm Street.
Illinois, Massachusetts, Maryland, Wisconsin, Hawaii, Oklahoma and Vermont have proposed various forms of tax increases on high earners, according to the National Conference of State Legislatures.
There is concern, though, that a wealth tax might drive away some of the largest taxpayers, costing states and local governments much needed revenues. New York Governor Andrew Cuomo opposed a wealth tax for that reason. Billionaire Elon Musk and multimillionaire Ben Shapiro have threatened to leave California because of the state’s tax burden.
A wealth flight from New York could have dire fallout. In September, the New York Times reported that unemployment in the city is 16%, and personal income tax revenue is expected to drop by $2 billion this year.
Why does that matter? The top 1% of earners pay 40% of New York state’s income taxes and 47% of New York City’s income taxes, according to the Empire Center for Public Policy.
Pros and Cons of a Wealth Tax
A Hill-HarrisX poll in January showed that two-thirds of the nation favored a wealth tax on billionaires, with a majority of Democrats and Republicans in favor.
Many economists believe that taxing the wealthy would help the economy. With the cost of health care, day care and housing increasing, the burden on low-to-middle class earners increases. Asking those with a net worth in excess of $50 million to give up two cents on the dollar doesn’t seem like asking a lot.
Middle and low-income families tend to spend more of their earnings, which fuels the economy. Wealthy earners tend to hoard or invest, and the profits from those investments are taxed at a lower rate than income tax. Imagine the economy being a set of gears that need to move to stay operational. The oil that fuels those economic gears comes from spending of available capital, tying up large sums of capital could cause those gears to lock up.
Objections to the tax are based on the principle in the United States that men and women should not be penalized for being successful, and because of difficulties in determining net worth.
A dozen European countries have tried wealth taxes, but many dropped them because of the challenges in administering them, which led to enforcement challenges. Only five countries in Europe still tax wealth – Belgium, Norway, Spain, Switzerland and the Netherlands.
Benefits of a Wealth Tax
Revenue from the wealth tax could help reduce the federal deficit, or provide much-needed money for federal projects as varied as modern infrastructure, clean energy, national parks and affordable health care. It also could help teachers, health care workers, schools and mental health professionals struggling during the pandemic.
Taxing wealth is also not a radical or new idea. In the 1950s and 1960s, the wealthiest in the country paid a top income tax rate of 91%. Today it is 43.4%.
Yes, it’s a Robin Hood effort, but at least a dozen billionaires have released statements saying they and the other uber-rich should pay more, among them Warren Buffett, Eli Broad and Bill Gates.
Consequences of a Wealth Tax
The problem with a wealth tax is determining net worth. The basis for that determination would have to be carefully studied and applied. Small differences in assessing the figure could mean a difference of millions of dollars.
The other question that must be answered: Is a wealth tax constitutional? The 16th Amendment permitted an income tax and does not specifically mention a wealth tax. Those most affected by the possibility certainly would have the means to challenge this kind of tax.
Americans generally do not like the idea of punishing success and a wealth tax is viewed by many as doing just that.
How a Wealth Tax Would Affect the Wealth Gap
The wealthiest 1% of Americans own 40% of the nation’s wealth, according to a 2017 study by economist Edward N. Wolff. That share is higher than it’s been since 1962, Wolff reported. Right now, income inequality in the United States is the highest of all the G7 nations.
The top 1% of the nation owns more wealth than the bottom 90% combined. Which leaves the majority of the country struggling to make ends meet. Programs and schools go underfunded as wealth flows to the top earners.
The Organization for Economic Cooperation and Development estimates that income inequality has cost nearly five points off economic growth in the world’s richest countries between 2000 and 2015. OECD also reports that because poor and lower income families have less access to higher education, their upward mobility and potential is stifled.
In a New York Times op-ed piece, Warren Buffett has called on our leaders to “stop coddling the super-rich.” And Ray Dalio (net worth: $18.7 billion) answered bluntly when asked on 60 Minutes if the rich should pay more: “Of course … Am I say something that’s controversial.”
How Much Do the Rich Pay in Taxes?
Americans for Tax Fairness reports that the richest 1% pay an effective federal income tax rate of 24.7%. That is just a small amount more than the 19.3% rate paid by someone making $75,000.
One out of five millionaires pays a lower rate than individuals who earn between $50,000 and $100,000. Those who make $10 million per year pay an average tax rate of 19%. With the tax loopholes available to the rich, it’s estimated that between $70 and $100 billion is lost annually in tax revenues.
It’s not fair to say that the rich don’t pay taxes. They do, and they pay a lot. The question is whether they should pay a larger percentage of their income and wealth than the average American.
Max Fay has been writing about personal finance for Debt.org for the past five years. His expertise is in student loans, credit cards and mortgages. Max inherited a genetic predisposition to being tight with his money and free with financial advice. He was published in every major newspaper in Florida while working his way through Florida State University. He can be reached at [email protected].
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- Li, H. and Smith, K (2020, January 27) Analysis of Sen. Warren and Sen. Sanders’ Wealth Tax Plans. Retrieved from https://taxfoundation.org/wealth-tax/
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