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Taxes & Spending Wealth Tax

Wealth Tax

Reads at about grade 4Both sides shown8 sources cited

A wealth tax is a yearly tax on the total value of what the richest people own, not just what they earn.

What it is

A wealth tax is a tax on net worth -- everything a person owns minus what they owe. Most taxes take a cut of money as you earn it; a wealth tax works differently, taking a small share of the whole pile each year, but only above a very high line. California has a proposed law, called AB 259. It would tax worldwide net worth above $50 million at 1% a year, with bigger fortunes, over $1 billion, paying a higher rate. The tax would touch only about the top 0.1% of Californians. Supporters estimate it could raise about $21.6 billion a year, though it could not start unless voters first changed the state constitution. How well it would work is debated. Some assets are easy to value, like stocks, bonds, and bank accounts; others are hard, like private businesses, art, and collectibles, which have no ready market price. Supporters treat the $21.6 billion estimate as solid; critics say the real number is very uncertain, depending on how much the rich hide wealth or move away. Both sides also point to Europe -- most countries that tried wealth taxes later ended them. Supporters say a modern, careful design could avoid those problems; critics say the record speaks for itself.

How it works

A normal income tax takes a cut only when you earn wages or sell something for a profit. But very rich people often hold stocks and businesses for years without selling, so their fortunes can grow while their taxable income stays low. Much of their gain is "unrealized" -- the value has grown on paper but has not been cashed in, and under today's rules, that gain is not taxed until it is sold. A wealth tax is meant to reach that growing pile directly. Supporters see it as a fairness fix and a big new source of money; opponents worry it is hard to run, easy to dodge, and may push rich people and their money out of the state. There is also a legal fight: California's constitution limits taxes on personal property, so the state would need voters to approve an amendment before the tax could begin. A federal version faces a different hurdle called apportionment -- a rule that splits some federal taxes among the states by population.

The debate — equal weight, both sides

The case for taxing extreme wealth
Most often made by progressive Democrats, labor unions, and economists such as Emmanuel Saez and Gabriel Zucman.

Wealth at the very top has grown huge, and the tax code lets much of it go untaxed. The share of all wealth held by the top 1% rose from 22.9% in 1979 to 34.9% in 2019. Yet the richest often pay tiny rates -- one analysis found the 25 richest Americans paid a "true" tax rate of just 3.4%, on average. Why so low? Most of their gains are never sold, so they are never taxed. About 63% of U.S. billionaires' $4.26 trillion in wealth is these untaxed, unsold gains. A wealth tax fixes this at the source: it taxes the fortune itself, not just income. The base is huge, an estimated $9 to $13 trillion for the richest 0.1% of families, so even a small yearly rate would raise a lot -- enough, backers say, to fund schools, fight homelessness, and protect services. And it asks nothing of regular people: only fortunes above $50 million would be touched at all. As the head of California's teachers union put it, working families "shouldn't have to subsidize the ultra-rich." Supporters say this simply asks those with the most to pay their fair share.

The case against a wealth tax
Most often made by conservatives, libertarians, business groups, and many tax economists who study Europe's experience.

The idea sounds simple, but it has a poor track record. Many European countries tried wealth taxes, and most later repealed them, meaning they canceled the tax. Officials pointed to low revenue, high costs to run, and rich people moving away -- on average, these taxes raised only about 0.2% of a country's total output, far less than hoped. And the money often just moves: after Norway raised its wealth tax, some billionaires left the country. California already holds about a quarter of all U.S. billionaires. They can leave too. The losses can outweigh the gains. By one estimate, for every $1 a Scandinavian wealth tax raised, 76 cents was lost from other taxes. Valuing fortunes is also very hard: stocks are easy to price, but private businesses, art, and collectibles have no clear market price, which invites endless disputes. A 2% or 3% yearly tax can even wipe out the whole return on safe savings. There is a legal cloud too. The plan needs a constitutional amendment just to take effect, and some legal scholars argue a federal version would break the Constitution's apportionment rule -- others disagree, and the question is unsettled. Critics conclude it would raise far less than promised, while slowing growth.

Sources

Behind the summary
Cited by "The case for taxing extreme wealth"
Cited by "The case against a wealth tax"

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