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May 4, 2021
An Economic Perspective on Wealth Taxes
The idea of imposing a tax on individual wealth has
Potential Policy Issues
appeared in policy debates with increasing frequency.
Enactment of a wealth tax would represent a significant
Proponents of a wealth tax have primarily argued that such
change in U.S. tax policy. The change would raise a
a tax would achieve three objectives. First, a wealth tax
number of policy issues and questions that Congress may
would mitigate rising wealth inequality. Second, the tax
choose to address.
would raise significant revenue that could be used to
address debt and deficit concerns, and fund a variety of
Revenue Yield
social policies. Finally, the tax could capture some income
The Joint Committee on Taxation (JCT) would provide
sources that currently are not taxed (e.g., unrealized capital
Congress with an official revenue estimate of any wealth
gains or types of imputed income).
tax proposal. A number of outside think-tank and academic
researchers have proposed revenue estimates of wealth
This In Focus presents an economic perspective on wealth
taxes, which vary depending on the assumed design of the
taxes. Because no federal wealth tax currently exists , the
tax.
discussion in this In Focus is primarily in terms of a
general wealth tax. Designing such a tax would require
For example, the Tax Policy Center (TPC) examined three
careful consideration about a number of specific issues.
stylized wealth taxes :
Where appropriate, the discussion highlights specific points
of consideration.
1. a tax equal to 1% of net wealth over $20
million ($40 million for joint filers);
Overview
2. a tax equal to 1% of net wealth between
At its most basic level, wealth is the value of all assets (e.g.,
$20 million and $100 million ($40
stocks, bonds, real estate, art) owned by an individual
million and $200 million for joint filers)
minus the value of their liabilities . As shown in Figure 1,
and 2% of net wealth over $100 million;
the concentration of wealth in the top 10% (i.e., top 1% plus
and
next 9%) of the wealth distribution in the United States has
3. a tax equal to 1% of net wealth between
increased over the past 30 years . The increase has been
$100 million and $1 billion and 2% of net
largest for the wealthiest households. The share owned by
wealth over $1 billion.
the top 1% rose by the greatest amount, from 23.4% in the
third quarter of 1989 to 31.4% in the fourth quarter of 2020.
The TPC estimates these three versions would raise $1.1
Over the same time period, the holdings of the top 1% of
trillion, $1.6 trillion, and $800 billion in revenues,
the wealth distribution have shifted toward stocks and
respectively, in the first 10 years, though they emphasize
business holdings.
revenue estimates are highly uncertain.
Figure 1. Share of Total Wealth by Wealth Percentile
Group in the United States, 1989 to 2020
The uncertainty surrounding wealth tax revenue estimates is
illustrated by the broad range of estimates of a legislative
proposal by Senator Warren (S. 510). The proposal would
levy a 2% tax on net wealth above $50 million plus an
additional 1% tax on wealth over $1 billion. Annual
estimates for this proposal range from $117 billion (Smith,
Zidar, and Zwick) to $275 billion (Saez and Zucman).
Authors of these estimates have noted the difficulty in
determining the magnitude of behavioral responses and
avoidance behavior that would occur if the proposal were
enacted.
Valuation
Determining the value of assets is a crucial aspect of
implementing a wealth tax. Valuations of bank accounts
and assets that are readily traded on financial markets, such
as stocks and bonds, would be relatively straightforward,
Source: Board of Governors of the Federal Reserve System.
although when such valuations were made would be
Notes: Quarterly data from Q3 1989 to Q4 2020.
important given fluctuations in asset values over time.
https://crsreports.congress.gov
An Economic Perspective on Wealth Taxes
Valuation of land and structures within the United States
Internal Revenue Service (IRS) estimates of the tax gap (the
could also likely be accomplished in a reasonable fashion
difference between taxes owed and taxes voluntarily paid)
given the prevalence of state and local property taxes, and
may offer insight into how the design of a wealth tax could
templates provided by private companies that provide
limit avoidance or evasion opportunities. In particular, IRS
estimates of market values for real estate. Valuation of land
estimates highlight the importance that third-party reporting
and property held abroad may be more difficult from an
could have on the rate of noncompliance. In their most
administrative and verification perspective.
recent tax gap study (covering tax years 2011-2013), the
IRS found that third-party reporting reduced the
Not all assets have a readily available market value. For
noncompliance rate by over two-thirds (from 55% to 17%).
example, the majority of U.S. businesses are privately held
A recent working paper by Guyton et al., however, suggests
(e.g., partnerships, sole proprietorships, S corporations,
that these estimates may underestimate noncompliance at
LLCs). For items such as fine art, wine, antique cars,
the top of the income distribution, as they are unlikely to
jewelry, and other collectables, there is often not a liquid
fully account for tax evasion through offshore accounts and
market that can be referenced for valuation purposes.
pass-through businesses.
Valuing intangible assets (patents, copyrights, etc.) could be
one of the more difficult aspects of levying a wealth tax.
In addition to third-party reporting, several general design
aspects could limit avoidance or evasion. All else equal, a
Still, there may be practical approaches to consistently, if
broader measure of taxable wealth would offer fewer
not accurately, applying values to many assets for tax
avoidance opportunities. However, the current estate tax
purposes. Saez and Zucman highlight that Section 409A of
offers some insights into planning techniques that could be
the Internal Revenue Code provides a potential framework
used to reduce wealth that would otherwise be subject to a
for valuing privately held businesses under a wealth tax,
wealth tax. These estate tax planning techniques include the
and that the IRS already collects data on private businesses.
use of family trusts, donor-advised funds, and related-party
Likewise, Saez and Zucman point out that collectables are
loan agreements. Such tax-planning techniques may
often insured, which requires a valuation be made, and that
warrant attention when designing a wealth tax.
such assets are a rather small share of total wealth.
Additionally, if a goal of a wealth tax is to target income
that escapes taxation under the income tax, there is the
Some issues with asset valuation or situations where the tax
potential for the tax on an asset to be greater than the
due exceeds the taxpayer’s liquid assets could be addressed
income produced by the asset—creating an effective
using some form of retrospective taxation. This could be
income tax rate greater than 100%—unless wealth tax rates
especially useful where determining the true value is
are low.
difficult (patents, copyrights, etc.) or when a taxpayer’s
wealth is primarily in illiquid or non-income producing
Constitutionality
assets. Senator Wyden proposed a type of retrospective tax
This In Focus presented an economic perspective on key
mechanism in the 115th Congress (as part of his mark-to-
policy issues surrounding a wealth tax. It is equally
market capital gains proposal).
important to consider whether such a federal tax is
permissible under the U.S. Constitution, which requires that
Avoidance and Evasion
a “direct tax”—which some legal scholars contend a wealth
One of the key drivers of the range of estimated revenue
tax is—be apportioned among states according to
yields presented earlier is the degree of avoidance included
population. There is considerable debate among legal
in the estimates. Since the United States does not have a
scholars on this issue. For more information on legal
wealth tax, these estimates are generally drawn from U.S.
aspects of taxation, see CRS Report R46551, The Federal
estate tax data or from the experiences of other countries—
Taxing Power: A Primer, by Milan N. Ball.
with estimates of avoidance (measured as a reduction in the
tax base) ranging from the midteen percentages up to the
midforty percentages. However, research by Saez and
Zucman highlights the role third-party reporting has had in
Mark P. Keightley, Specialist in Economics
reducing wealth tax avoidance in other countries, and
Donald J. Marples, Specialist in Public Finance
suggests that with careful design, avoidance rates at or
below the lower end of this range could possibly be
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achieved.
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An Economic Perspective on Wealth Taxes
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